Minerals Resource Rent
Tax

The Minerals
Resource Rent Tax (MRRT) is a tax on the economic rents miners make
from the taxable resources (iron ore, coal and some gases) after
they are extracted from the ground but before they undergo any
significant processing or value add. ‘Economic
rent’ is the return in excess of what is needed to attract
and retain factors of production in the production
process.

The MRRT is a
project-based tax, so a liability is worked out separately for each
project the miner has at the end of each MRRT year. The
miner’s liability for that year is the sum of those project
liabilities.

The tax is imposed
on a miner’s mining profit, less its MRRT allowances, at a
rate of 22.5 per cent (that is, at a nominal rate of 30 per cent,
less a one-quarter extraction allowance to recognise the
miner’s employment of specialist skills).

A project’s
mining profit is its mining revenue less its mining
expenditure. If the expenditure exceeds the revenue, the
project has a mining loss. Mining revenue is, in general, the
part of what the miner sells its taxable resources for that is
attributable to the resources in the condition and location they
were in just after extraction (the ‘valuation
point’). Mining revenue also includes recoupments of
some amounts that have previously been allowed as mining
expenditure.

Mining expenditure
is the cost a miner incurs in bringing the taxable resources to the
valuation point.

Mining allowances
reduce each project’s mining profit. The most
significant of the allowances is for mining royalties the miner
pays to the States and Territories. It ensures that the
royalties and the MRRT do not double tax the mining
profit.

In the early years
of the MRRT, the project’s starting base provides another
important allowance. The starting base is an amount to
recognise the value of investments the miner has made before the
MRRT.

Other allowances
include losses the project made in earlier years and losses
transferred from the miner’s other projects (or from the
projects of some associated entities).

If a miner’s
total mining profit from all its projects comes to less than
$50 million in a year, there is a low-profit offset that
reduces the miner’s liability for MRRT to nil. The
offset phases out for mining profits totalling more than $50
million.

Date of
effect : The MRRT applies from
1 July 2012.

Proposal
announced : The MRRT was announced in
the Treasurer’s Media Release No. 055 of 2 July 2010.

Financial
impact : The MRRT will have these
revenue implications:

2011-12

2012-13

2013-14

2014-15

Nil

$3,700m

$4,000m

$3,400m

Compliance cost
impact : This measure is expected to
impose significant compliance costs on taxpayers in the iron ore
and coal sectors (approximately 320 taxpayers). In the first
year of the MRRT’s operation, taxpayers will need to value
their starting base and modify their accounting procedures.
Ongoing compliance costs will reduce over the medium to long
term.

Outline of chapter

1.1
This chapter explains the rationale for charging for
Australia’s non-renewable resources.

Australia’s non-renewable
resources

1.2
Australia is naturally endowed with a large, high
quality non-renewable resource base.

1.3
Non-renewable resources are stocks of minerals and petroleum
that are exhaustible and depletable.

1.4
The majority of Australia’s non-renewable resources are
publicly owned. The rights to these non-renewable
resources are vested in the Crown.

Non-renewable resources and
taxation

1.5
It is the characteristic of non-renewability that allows
exploitation of these resources to generate economic rent or above
normal profit. Economic rent can generally be taxed without
distorting the decisions of investors if the tax is well
designed.

1.6
There are two main types of resource taxes: royalties and resource
rent taxes.

Royalties

1.7
In Australia, State and Territory governments typically tax
non-renewable resources by applying a royalty to
production. Royalties are generally applied on the basis of
volume or value and do not take into account how profitable a
mining operation is.

1.8
Royalties therefore may only recover a portion of mining rents when
mining profits are high, but will also tax mining operations where
no economic rent is present, such as when profits are low.

Resource rent taxes

1.9
Resource rent taxes are profit-based, cash flow, taxes.
They differ from most royalties in that they take into account the
profitability of a mining operation. A resource rent tax
collects a percentage of the resource project’s economic
rent.

1.10
One form of resource rent tax is the Brown tax, invented by Cary
Brown in 1948. A Brown tax is a pure cash flow tax levied (at
a constant percentage) on the difference between revenue and
expenditure.

(i)
When there is a positive cash flow, the government taxes that
positive cash flow. When there is a negative cash flow,
typically at the investment phase, the government provides an
immediate refund at the tax value.

(ii)
The tax rate determines the portion of economic rent that the
government collects, and the value of the refund that they
provide.

1.11
Under a Brown tax, the government is effectively sharing in the
profits and costs of the mining project in proportion to the tax
rate.

1.12
However, the Brown tax model is difficult to implement because of
the immediate nature of the refund. So governments typically
rely on other models of resource rent taxes that mimic the effect
of the Brown tax.

1.13
The Garnaut — Clunies-Ross resource rent tax is a
resource rent tax model that attempts to replicate the effects of a
Brown tax. It is named after the Australian economists Ross
Garnaut and Anthony Clunies-Ross. The Garnaut —
Clunies-Ross resource rent tax is levied on the positive cash
flows, or profits, of a project, but there is no refund when the
cash flow is negative or the taxpayer is making a loss.
Instead, losses are carried forward and ‘uplifted’ by
an interest rate, so that they can be used as a deduction against
positive cash flows in later years.

1.14
The uplift rate preserves the value of the taxpayer’s losses
because they do not get an immediate refund for the tax value of
the government’s contribution to the mining project.
The uplift rate also includes a premium to compensate for the risk
that the taxpayer may never get to use its losses.

Background to the Minerals Resource Rent
Tax

1.16
The Minerals Resource Rent Tax (MRRT) has its origins in the
recommendations of the Australia’s Future Tax System (AFTS)
Review.

1.17
The AFTS Review found that the royalty regimes applied by the
States and Territories were among the most distorting taxes in the
Federation. In addition, royalty regimes are not particularly
flexible.

1.18
As a consequence of being distorting and relatively inflexible,
royalties tend to be set at rates low enough for the mining
industry to continue to operate in periods of low to average
commodity prices. However, this means that royalties will
often fail to provide an adequate return to the community when
commodity prices are high.

1.19
The company tax is a profits-based tax, which generally
applies to incorporated businesses and will tend to raise more
revenue from mining operations when profits are high.
However, the AFTS Review found that there would be benefits to the
economy more broadly through lowering the company tax rate to
assist in attracting internationally mobile capital investment.

1.20
The AFTS Review concluded that a lower company tax rate was
desirable for Australia but only if a specific profits-based
tax was extended to mining operations to ensure a sufficient return
to the community in periods of high commodity prices.

1.21
In response to the AFTS review, the Government decided that, from 1
July 2012, the MRRT would apply to profits from coal and iron ore
operations, while the PRRT would be extended to all offshore and
onshore gas and oil projects, including coal-seam
methane. These commodities account for the bulk of
Australia’s mineral wealth.

1.22
The detailed design of the MRRT is based on the recommendations of
the Policy Transition Group. The Policy Transition Group was
chaired by Don Argus AC and the Hon Martin Ferguson AM MP, Minister
for Resources, Energy and Tourism. The Policy Transition
Group consulted extensively across Australia on the new resource
tax arrangements and reported to the Government in December
2010.

The Minerals Resource Rent
Tax

1.23
The MRRT is a type of resource rent tax based on the
Garnaut — Clunies-Ross model.

1.24
Under the MRRT, the government taxes positive cash flows, or mining
profits, and allows taxpayers to carry forward and uplift losses
with interest for use in later years.

1.25
As the MRRT taxes profits from minerals that are commonly subject
to State and Territory royalties, it provides a credit for
royalties.

1.26
The tax base for the MRRT is confined to net profits at the
valuation point. The valuation point is the point in the
mining production chain that separates upstream and downstream
operations.

1.27
As the MRRT is intended to apply only to upstream profits, it is a
tax on a narrow portion of mining profits unlike, for example, the
income tax, which seeks to tax all sources of income
comprehensively.

1.28
The MRRT is a tax on realised profits. As the proceeds from
the sale of a resource are typically realised downstream of the
valuation point, the MRRT requires taxpayers to determine the
amount of those proceeds that are reasonably attributable to the
resource and upstream operations for tax purposes. The tax is
not intended to tax the value added in downstream activities.

1.29
To calculate the MRRT profit at the valuation point, the sales
proceeds are reduced by an amount that recognises the arm’s
length value of the downstream operations using the most
appropriate and reliable method. Allowable upstream capital
and operating expenditure is then directly and immediately
deducted, along with royalty credits, carry forward losses,
starting base depreciation, starting base losses and losses
transferred from other projects.

1.30
If losses and royalty credits cannot be used within an MRRT year,
they are transferred where possible, or carried forward to later
years with the relevant uplift rate applied.

1.31
Through providing effective deductions for all allowable capital
and operating expenditure, with an uplift of carry forward losses,
the tax base for the MRRT approximates a Brown tax on the profit
attributable to the resource in the state it was in at the
valuation point.

1.32
As the sources of mining rents are difficult to identify separately
in practice, the MRRT aims to strike an appropriate balance between
recovering a sufficient return to the community for the profits
attributable to the underlying resource rent at the valuation
point, and recognising that some mining expertise and capital may
also be taxed in a process which has regard to realised
profits and their equivalents. This balance is achieved
through the combined effect of the features of the tax, including
the tax rate, the extraction factor, the valuation point, the
interest allowance (uplift) and the scope of assessable revenues
and allowable deductions.

1.33
An overview of the operation of the MRRT is provided in Chapter
2.

Outline of chapter

2.1
This chapter is an overview of the Minerals Resource Rent Tax
(MRRT). It outlines the resources that are subject to MRRT
and explains the basic operation of the MRRT.

Overview of the MRRT

What resources are
covered?

2.2
Australia is endowed with some of the world’s largest and
most valuable deposits of iron ore and coal. These bulk
commodities make up a large proportion of Australia’s mine
production and mineral exports.

2.3
The MRRT applies to certain profits from iron ore and coal
extracted in Australia. It also applies to profits from gas
extracted as a necessary incident of coal mining and gas produced
by the in situ
combustion of coal. These non-renewable resources are
called ‘taxable resources’.

2.4
Where profits are made from the sale of taxable resources, or would
have been made if the resources had been sold instead of being
exported or used, MRRT may be payable.

Basic operation of the
MRRT

2.5
This section explains the operation of the MRRT and how it applies
to three different cases. The first case, the
‘vanilla’ case, examines how the MRRT operates for a
project that was not in existence before the announcement of the
MRRT.

2.6
The second case examines how the MRRT operates for projects that
are transitioning into the MRRT (that is, for projects that were
already invested in when the MRRT was announced). It explains
how the MRRT recognises those existing investments.

2.7
The third case shows how the MRRT operates for miners with multiple
projects. It introduces the concepts of pre-mining
losses and transferring mining losses and pre-mining losses
between projects owned by the miner. It also explains the
process of ‘uplifting’ unused amounts.

The ‘vanilla’
case

2.8
The key purpose of the MRRT is to tax the economic rents from
non-renewable resources after they have been extracted from
the ground but before they have undergone any significant
processing or value-add. Generally, the profit
attributed to the resource at this point represents the value of
the resource to the Australian community. Where the taxable
resource is improved through beneficiation processes, such as
crushing, washing, sorting, separating and refining, the value
added is attributable to the miner.

Mining project interests

2.9
The mining project interest provides the basic unit for taxing the
non-renewable resource. The main kind of
mining
project interest is an entitlement to share in the
output of a mining venture carried on to extract taxable resources
and produce a resource commodity (which could be the taxable
resource or something produced from the taxable resource). It
must relate to at least one production right. A
production
right is a right, under an Australian law, that
authorises its holder to extract the resources from a particular
area (called a ‘project area’).

Mining profit or loss

2.10
Once a mining project interest has been identified, the mining
profit for the interest for the year has to be determined.
The mining
profit is the mining project interest’s mining
revenue for the year less its mining expenditure. If the
mining expenditure exceeds the mining revenue, the excess is a
mining
loss .

Mining revenue

2.11
The main type of mining revenue
a mining project interest can have comes from selling, exporting or
using taxable resources (or things produced from taxable resources)
extracted from the project area. The proceeds are mining
revenue to the extent they are reasonably attributable to the
taxable resources at a particular point in the production chain
(called the ‘valuation point’).

2.12
Under the MRRT, the valuation
point is typically just before the taxable resource
leaves the run-of-mine stockpile (also called the ROM stockpile or
ROM pad). The run-of-mine stockpile is where the resource is
stored after extraction ready for the next stage of
production. The next unit of production could be
transportation but is often some form of processing. However,
not all mining operations use a run-of-mine stockpile. Where
a project has no run-of-mine stockpile, or it is by-passed
for any reason, the valuation point is generally just before the
first beneficiation process starts.

2.13
Mining operations that occur before the valuation point are
upstream
mining operations ; those that occur afterwards are
downstream
mining operations .

Diagram 2.1 : The
valuation point

In this
diagram, the dashed line represents the valuation point at the
run-of-mine stockpile. Upstream and downstream mining
operations are illustrated.

2.14
The MRRT is a tax on proceeds from selling a taxable resource (or
on the proceeds which would have been realised if the resources had
been sold instead of exported or sold) but only on that part of
those proceeds that is reasonably attributable to the condition and
location of the resource when it was at the valuation point.
That amount must be attributed using the most appropriate and
reliable method having regard to the miner’s circumstances,
the available information and certain statutory assumptions (to the
extent to which they are relevant in applying a particular
method). The statutory assumptions are that the downstream
operations are carried on by a separate entity who has no interest
in the resource and who deals independently with the miner in a
competitive market.

2.15
Miners can elect to use a safe harbour method under which the
mining revenue amount is worked out by reducing the amount realised
from selling the resource (or, the arm’s length value of the
resource when it is exported or used) by the cost of its downstream
mining operations — being its operating costs, any
depreciation and its cost of capital (being its weighted average
cost of capital).

2.16
An alternative, and simpler, valuation method is provided for
smaller miners and miners who transform resources they mine in an
integrated operation, such as steel manufacturing or electricity
generation, to work out the mining revenue attributable to their
resources.

2.17
The alternative valuation
method is a version of the ‘netback’
method, which starts with a verifiable price and deducts costs to
‘net back’ to the value at an earlier point.
Miners who have not elected to use the alternative valuation method
may use the netback method to value their taxable resources, but
they will have to work out the inputs using the most appropriate
method instead of using those prescribed for the alternative
valuation method.

Mining expenditure

2.18
The MRRT recognises the majority of upstream costs incurred by the
miner in extracting the non-renewable resource and getting it
to the valuation point.

2.19
Upstream costs are called mining
expenditure if they are necessarily incurred by the
miner in carrying on the upstream mining operations. Mining
expenditure includes costs related to construction of the mining
operation, blasting and digging, infrastructure, and capital assets
used to transport the non-renewable resource to the valuation
point (such as dump trucks and conveyor belts).

2.20
Under the MRRT, upstream capital expenditure is immediately
deductible. Unlike income tax, capital assets do not have to
be depreciated over their effective lives.

2.21
Some expenditure is specifically excluded from being taken into
account as mining expenditure, including financing payments, the
costs of acquiring a mining interest, royalty payments, and some
tax payments.

Allowances

2.22
Miners reduce their mining profit by their MRRT
allowances , to arrive at a net amount, which, for
convenience, is referred to in this chapter as the MRRT profit.

2.23
In the vanilla case, the relevant allowances are royalty allowances
and mining loss allowances.

Royalty allowances

2.24
Miners will generally pay royalties to State and Territory
Governments. Royalty regimes and rates vary across
jurisdictions but are most commonly a charge on the volume or value
of the resource, generally at the point of export or sale to a
third party. These royalties are often a proxy for the rents
available from that resource.

2.25
The miner will be liable to pay some MRRT in addition to royalties
when resource rents are sufficiently high. That is, the
company will pay the royalty and then also pay MRRT. However,
the MRRT recognises this by providing the miner with a deduction,
called a royalty
allowance . The royalty allowance is
‘grossed-up’, using the MRRT rate, so that it
reduces the MRRT liability by the amount of the royalty.

2.26
Where the full royalty credits for the year cannot be applied as a
royalty allowance, the unused portion is uplifted and carried
forward to be applied in a later year. The uplift rate is the
long term bond rate plus 7 per cent (LTBR + 7 per
cent).

Mining loss allowances

2.27
If a mining project interest has a loss for the year, the loss is
uplifted at LTBR + 7 per cent and carried forward to be
used in a later year. When it is applied to reduce a mining
profit of the mining project interest in a later year, it is called
a mining
loss allowance .

MRRT liability

2.28
If the MRRT profit is above zero after deducting the allowances,
the mining project interest is subject to tax under the MRRT.
The MRRT liability for the interest is calculated by multiplying
the MRRT profit by the MRRT rate.

2.29
The MRRT
rate is 30 per cent. However, the MRRT
recognises that miners employ specialist skills to extract the
resource and bring it to the valuation point. It recognises
the value of those specialist skills through a special feature
called the extraction factor. The extraction factor reduces
the MRRT rate by 25 per cent, to produce an effective MRRT rate of
22.5 per cent.

Diagram 2.2 : Calculating
MRRT liability

The miner
calculates its mining revenue for its mining project interest and
subtracts its mining expenditure to work out its mining
profit. It then reduces its mining profit by its royalty
allowance and its mining loss allowance to produce its MRRT
profit. If the miner has an MRRT profit, its MRRT liability
equals that net profit multiplied by the MRRT
rate.

Example
2.1 : The basic MRRT calculation

In a particular
year, Midcap Mining Co. receives $500 million of mining revenue
from its mining project interest. It incurs $120 million in
upstream expenses and pays a royalty of $37.5 million to a
State. It has $50 million of losses carried forward from the
previous year. The long term bond rate (LTBR) is 6 per
cent.

Mining
revenue

$500m

Mining
expenditure

($120m)

Mining
profit

$380m

Royalty allowance
[royalty payable/0.225]

($166.7m)

Mining loss
allowance [earlier loss Ã (LTBR + 7%)]

($56.5m)

Total
allowances

($223.2m)

MRRT
profit

$156.8m

MRRT liability
[MRRT profit Ã 0.225]

$35.3m

In this example,
Midcap Mining Co. is liable to pay MRRT of
$35.3 million.

Offset for low-profit
miners

2.30
If a miner’s mining profit is $50 million or less, it is
entitled to a low-profit offset that will reduce its total
MRRT liability to nil. If its mining profit is over $50
million, its offset is gradually phased out. In working out
this mining profit, the miner must also count any mining profit of
other entities it is connected to or affiliated with.

2.31
Even though a miner’s mining profit might be under
$50 million, it still deducts its allowances and carries
forward any remainder.

The second case — treatment of existing
investments

2.32
The second case involves miners with an existing mining project
interest at 1 May 2010 (that is, before the announcement
of a resource rent tax). To recognise their existing
investment, those miners receive an allowance, called a
starting
base allowance , which further reduces their mining
profit.

2.33
The starting base for a mining project interest may be calculated
using the miner’s choice of two methods.

2.34
The market value method uses the market value of the mining project
interest’s upstream assets at 1 May 2010. The book
value method uses the most recent audited accounting value of those
assets at 1 May 2010.

2.35
There are some other key differences between the two methods apart
from their different values:

â¢
the market value method includes the value of the mining right,
while the book value method excludes it;

â¢
the market value method recognises the starting base for each asset
over its remaining effective life, while the book value method
recognises the starting base, in set proportions, over five
years;

â¢
there is no uplift for the remainder of the starting base under the
market value method but the remainder under the book value method
is uplifted by LTBR + 7 per cent; and

â¢
under the market value method, starting base losses unable to be
applied in the year are uplifted at the consumer price index (CPI)
rate, while they are uplifted at LTBR + 7 per cent
under the book value method.

Diagram 2.3 : Calculating
MRRT Liability

The miner
calculates its mining revenue for its mining project interest and
subtracts its mining expenditure to work out its mining
profit. It then reduces its mining profit by its royalty
allowance, its mining loss allowance and its starting base
allowance to produce its MRRT profit. If the miner has an
MRRT profit, its MRRT liability equals that MRRT profit multiplied
by the MRRT rate.

Example
2.2 : The MRRT calculation with a starting
base

In a particular
year, Eisenfluss Mining receives $600 million of mining revenue
from its mining project interest. It incurs $120 million in
upstream expenses, pays a royalty of $37.5 million to a State, and
has a market value starting base of $3 billion, which it writes off
over 25 years at $120 million a year. It has $50 million
of losses carried forward from the previous year. The LTBR is
6 per cent.

Mining
revenue

$600m

Mining
expenditure

($120m)

Mining
profit

$480m

Royalty allowance
[royalty payable/0.225]

($166.7m)

Mining loss
allowance [earlier loss Ã (LTBR + 7%)]

($56.5m)

Starting base
allowance

($120m)

Total
allowances

($343.2m)

MRRT
profit

$136.8m

MRRT liability
[MRRT profit Ã 0.225]

$30.8m

In this example,
Eisenfluss Mining is liable to pay MRRT of
$30.8 million. Its existing investment in its mining
project interest has reduced its MRRT liability by $27
million.

2.36
If a starting base allowance for a particular year cannot be used,
the unused portion is uplifted and carried forward to be used in
later years. If the starting base was valued at market value,
the uplift rate is the CPI. If the starting base was valued
at book value, the uplift rate is LTBR + 7 per
cent.

Example
2.3 : Carrying forward starting base
losses

In year 1, Big
Mountain Pty Ltd receives $100 million of mining revenue from its
mining project interest. It incurs $50 million of mining
expenditure, and pays a royalty of $7.5 million to a State.
It has no mining losses in year one. Its market value
starting base is valued at $500 million, which it is writing off
over 25 years. In year 1, $3.3 million of Big
Mountain’s starting base loss for the year is unused because
it has insufficient mining profits left after reducing them by its
royalty allowance. This unused portion is uplifted at the CPI
rate. The CPI for year 1 is 2.5 per cent.

In year 2, Big
Mountain receives $250 million of mining revenue from its
interest. It incurs $50 million of mining expenditure and
pays a state royalty of $15 million. Big Mountain has no
mining losses from year 2, as all project expenses were
deducted.

Year 1
($)

Year 2
($)

Mining
revenue

100m

250m

Mining
expenditure

(50m)

(50m)

Mining
profit

50m

200m

Royalty
allowance

(33.3m)

(66.7m)

Mining loss
allowance

0

0

Starting base
allowance

(20m)

(23.4m) †

MRRT
profit

0

109.9m

MRRT
liability

0

24.7m

In this example,
the unused starting base allowance from year 1 is uplifted at the
CPI rate and included in the year 2 starting base
allowance.

† (($20m
for year 2) + (year 1’s unused $3.3m Ã 1.025)) =
($23.38m)

The third case — multiple interests or
pre-mining expenditure

2.37
The third case involves miners with pre-mining expenditure
and miners with more than one mining project interest.

Pre-mining
expenditure

2.38
The MRRT recognises that exploration expenditure, and other
pre-mining expenditure, in pursuit of taxable resources is a
necessary part of the mining process and should be recognised as a
cost of that process.

2.39 Pre-mining
expenditure can occur in relation to project areas
for existing mining project interests or in relation to areas
covered by tenements that do not allow commercial extraction of
resources (such as exploration tenements). Interests in those
tenements are called pre-mining project
interests . Regardless of where the expenditure
occurs, it is recognised for MRRT purposes. However, it is
recognised in different ways.

2.40
Pre-mining expenditure incurred in relation to a mining
project interest is deducted along with the interest’s other
mining expenditure. That expenditure could form part of a
mining loss for that interest and could be transferable to another
of the miner’s mining project interests producing the same
resource.

2.41
Pre-mining expenditure incurred in relation to a
pre-mining project interest goes into working out a
pre-mining loss. Pre-mining losses can be
transferred to any of the miner’s mining project interests
producing the same taxable resource. If a miner disposes of a
pre-mining project interest, the purchaser would generally be
able to transfer pre-mining losses that come with it to any
of its mining project
interests producing the same taxable resource.

2.42
If a pre-mining project interest with pre-mining losses
matures into a mining project interest, the pre-mining losses
will become attached to the mining project interest.

2.43
A pre-mining loss that cannot be used by its mining project
interest, or transferred to another interest, is uplifted at
LTBR + 7 per cent for up to 10 years. After that,
any remaining pre-mining loss is uplifted at the LTBR.

Transferring losses

2.44
A miner with two or more mining project interests that produce the
same taxable resource must transfer unused losses from one project
interest to another. It can only do so to the extent that the
other project has sufficient mining profits to absorb the remaining
losses once it has applied its own royalty, mining loss and
starting base allowances. Miners must transfer mining losses
in the same order they arose.

2.45
Losses attached to a mining project interest the miner acquired
from someone else cannot be transferred to another project interest
unless both project interests have been in common ownership at all
times since the loss arose.

2.46
Royalty credits usually cannot be transferred from one mining
project interest to another and a project interest’s starting
base can never be transferred to another project interest.

Diagram 2.4 : Calculating
MRRT liability

The miner
calculates its mining revenue for its mining project interest and
subtracts its mining expenditure to work out its mining
profit. It then reduces its mining profit by its royalty
allowance, its pre-mining loss allowance, its mining loss
allowance, its starting base allowance, and its allowances for
pre-mining losses and mining losses transferred from other
project interests, to obtain its MRRT profit. If the miner
has an MRRT profit, its MRRT liability equals that profit
multiplied by the MRRT rate.

Example
2.4 : Transferring losses

Cobb & Coal
Brothers Ltd operates two coal mining project interests and has a
pre-mining project interest on which it is exploring for
coal.

Mining project
interest (MPI) 1 has mining revenue for the year of
$35 million and mining expenditure of $120 million. It
also pays a State royalty of $2.5 million.

MPI 2 has mining
revenue of $90 million and mining expenditure of $30 million.
It pays a State royalty of $5.7 million.

The
pre-mining project interest has pre-mining expenditure
of $7 million and no revenue.

MPI 1 has a mining
loss of $85 million. Its royalty payment converts into a
royalty credit of $11.1 million. It has no profit, so cannot
use it as an allowance. Since it also cannot be transferred,
it will be uplifted and carried forward to the next
year.

MPI 2 has a
mining profit of $60 million. It has a royalty allowance of
$25.3 million, which reduces its mining profit to $34.7
million. It then transfers in the $7 million pre-mining
loss from the pre-mining project interest as a pre-mining
loss allowance. It still has $27.7 million of its mining
profit remaining, so it next transfers in $27.7 million of the
mining loss from MPI 1 as a transferred mining loss
allowance. That reduces MPI 2s MRRT profit to nil and MPI 1s
mining loss to $57.3 million. That amount is uplifted
and carried forward to the next year.

MPI 1
($)

MPI 2
($)

Pre-MPI
($)

Mining
revenue

35m

90m

0

Mining
expenditure

(120m)

(30m)

(7m)

Mining
profit/(loss)

(85m)

60m

0

Pre-mining
loss

0

0

(7m)

Royalty
allowance

0

(25.3m)

0

Transferred
pre-mining loss allowance

0

(7m)

0

Transferred mining
loss allowance

0

(27.7m)

0

MRRT
profit/(loss)

(57.3m) †

0

0

Net pre-mining
loss

0

0

0 *

In this
example, the pre-mining loss from the pre-mining
project interest, and part of the mining loss from MPI 1, are
transferred to MPI 2 to reduce its MRRT profit to nil.
Both transfers are possible because the transferring and receiving
interests relate to the same type of taxable
resource.

†
After transferring $27.7 million to MPI 2. * After transferring $7
million to MPI 2.

Combining project
interests

2.47
A miner with several mining project interests must combine them
into a single mining project interest if they meet the integration
criteria (and satisfy other conditions designed to prevent
interests combining if that would effectively transfer allowances
that are not otherwise transferable).

2.48
There are two possible ways that a miner’s separate mining
project interests can be integrated. First, they will be
integrated if:

â¢
each interest produces the same taxable resource; and

â¢
each of the interests relates to the same mine or proposed
mine.

2.49
Second, a miner’s interests will be integrated if:

â¢
each interest produces the same taxable resource;

â¢
the miner conducts their downstream operations together as one
operation; and

â¢
the miner has chosen
to treat its integrated downstream operations in that way for MRRT
purposes.

2.50
In deciding whether a miner conducts the downstream operations of
the mining project interests as one operation, an important
consideration will be the extent to which the relevant
infrastructure is used in an integrated way to produce a saleable,
exportable or usable resource commodity.

2.51
Mining project interests that would otherwise be required to
combine cannot combine if either of them has a starting base or an
unused royalty credit (there is an exception for some interests the
miner has owned since before 1 May 2010). They also
cannot combine if one of them has a mining loss that arose when the
two interests were not in common ownership.

Diagram 2.5 : Integrated
mining project interest

In this diagram,
the miner has four MPIs relating to the same resource. If
they all relate to a single mine or proposed mine, they would be
upstream
integrated . If they are not a single mine or
proposed mine, but their downstream activities are managed as an
integrated operation (for example, if they all use common
processing infrastructure), they would be integrated if the miner
has made a downstream
integration choice.

If the four
interests were integrated in either of those ways, they would
combine into one MPI. However, if one of the MPIs has a
starting base, a royalty credit or a mining loss attributable to a
time when it was not in common ownership with each of the other
interests, it could not be part of the combined
interest.

Transferring and splitting mining project
interests

2.52
Mining project interests can be transferred (for example, by
sale). A mining project interest is transferred if the whole
entitlement comprising the mining project interest passes to
another entity.

2.53
If there is only a part disposal of the entitlement comprising the
mining project interest, the mining project interest will
split. A mining project interest can also split if a combined
interest stops being integrated.

2.54
When a mining project interest is transferred, any mining revenue
and mining expenditure for the mining project interest to the date
of the transfer, and any royalty credits, mining losses,
pre-mining losses, and starting base amounts of the mining
project interest, will be inherited by the transferee.

2.55
When a mining project interest splits, any mining revenue and
mining expenditure for the mining project interest to the date of
the split, and any royalty credits, mining losses, pre-mining
losses, and starting base amounts of the mining project interest,
will be divided among the split mining project interests.

2.56
Each of the split interests inherits a proportion of each of those
things equal to its share of the total market values of all the
split interests.

Simplified MRRT for smaller
operations

2.57
The MRRT recognises that some miners may be below the
$50 million profit threshold for some time before they start
having an MRRT liability. These miners would face an
unnecessary compliance burden if they were required to fully comply
with MRRT obligations and determine their starting base, calculate
their mining revenue and track their losses and royalties.

2.58
Those miners may choose to avoid any MRRT liability for a
particular year if either:

â¢
their earnings before interest and tax, and that of the entities
connected to or affiliated with them, totals less than $50 million
for that year; or

â¢
their earnings before interest and tax (and that of those related
entities) totals less than $250 million and every mining project interest of
those entities has royalties amounting to at least 25 per cent of
the interest’s earnings before interest and tax.

2.59
A miner who chooses to use the simplified MRRT method loses any
starting base, starting base losses, mining losses,
pre-mining losses and royalty credits for all its mining
project interests and pre-mining project interests.
They would begin to generate new losses and royalty credits after
they stop using the simplified MRRT method.

Outline of chapter

3.1
This chapter explains the framework for calculating how much
Minerals Resource Rent Tax (MRRT) a miner must pay for an MRRT
year. It also explains some of the basic building blocks of
the MRRT, such as ‘mining project interest’,
‘project areas’, ‘production right’,
‘Australia’ ‘taxable resources’ and
‘valuation point’.

3.2
All legislative references throughout this chapter are to the
Minerals Resource Rent Tax Bill 2011 unless otherwise
indicated.

Summary of new law

General liability

3.3
An entity that has a mining project interest is a
‘miner’.

3.4
The key element in working out a miner’s liability for MRRT
for a year is to work out the MRRT liability on the mining profits
of each of its mining project interests for the year.

3.5
Mining revenue, mining expenditure and MRRT allowances are
calculated in respect of each mining project interest that a miner
has.

3.6
If there is no mining profit for a mining project interest for a
year, the miner will not have an MRRT liability for that mining
project interest.

3.7
If there is a mining profit for the mining project interest for the
year, that profit may be reduced to nil by MRRT allowances that
relate to the interest. MRRT allowances are applied in a
particular order. Applying MRRT allowances has the effect of
reducing the MRRT liability the miner has for the mining project
interest.

3.8
A miner’s overall MRRT liability for a year may be reduced to
nil by the low profit offset or the rehabilitation tax
offset. If there is an excess rehabilitation tax offset, this
may result in a refund for the miner.

Mining project interest

3.9
A miner is an entity that has a mining project interest.

3.10
An entity has a mining project interest if it is entitled to a
share of taxable resources (or things produced from taxable
resources) produced by a mining venture in which the entity is a
participant.

3.11
A mining venture is an undertaking a purpose of which is to extract
some or all of the taxable resources from an area covered by one or
more production rights and to produce an output which includes
taxable resources or something produced using taxable
resources.

3.12
If a mining venture relates to one or more production rights,
participants in that venture have separate mining project interests
in relation to each production right.

3.13
Alternatively, if there is no mining venture in relation to the
extraction of some of the taxable resources from an area covered by
a production right, an entity has a mining project interest to the
extent to which it is entitled to extract taxable resources from
that area.

Project areas

3.14
The project area for a mining project interest that is an
entitlement to share in the output of a mining venture is the area
covered by the production right to which the mining venture
relates.

3.15
The project area for a mining project interest that is an
entitlement to extract resources is so much of the area covered by
the production right in respect of which an entity is entitled to
extract taxable resources.

Production right

3.16
A production right is an authority or right under Australian law to
extract a taxable resource from a particular area in Australia or,
if such a right is not required for that area, it is an interest in
land that allows a person to extract a taxable resource from the
area.

Meaning of Australia

3.17
Australia, when used in a geographical sense, includes all the
external Territories (except the Australian Antarctic Territory)
and the offshore areas as defined in the Offshore Petroleum and Greenhouse Gas Storage
Act 2006 .

Taxable resources

3.18
Taxable resources are quantities of iron ore, coal, gas extracted
as a necessary incident of coal mining, and anything produced from
the in situ
consumption of iron ore or coal.

Valuation point

3.19
For coal and iron ore, the valuation point is just before it leaves
the mining project interest’s run-of-mine
stockpile.

3.20
If there is no run-of-mine stockpile, or if it is
bypassed in a particular case, the valuation point is instead
immediately before the resources enter their first beneficiation
process at the mine site, or immediately after leaving the point of
extraction if there is no such process.

3.21
For any gas that is a taxable resource, the valuation point is when
it exits the wellhead.

3.22
If there is a supply of the resources before they reach their
valuation point, the point of supply becomes the valuation
point.

Detailed explanation of new
law

A miner’s liability for
MRRT

3.23
The amount of MRRT a miner must pay is the sum of the miner’s
MRRT liabilities for each of its mining project interests for an
MRRT year, reduced by the low profit offset and the rehabilitation
tax offset. [Sections 10-1, 10-15
and 225-25]

3.24
An MRRT
year is a ‘financial year’ as defined in
section 995-1 of the ITAA 1997, starting on or after 1 July
2012, adjusted to allow for substituted accounting periods.
[Section
10-25]

3.25
A miner’s MRRT liability for a mining project interest is
worked out by applying the MRRT rate to the mining project
interest’s mining profit reduced by any MRRT allowances
applicable to the mining project interest. MRRT allowances
cannot reduce a MRRT liability below nil. [Section
10-5]

3.28
The MRRT allowances must be applied in a particular order.
Broadly, the principle is that project specific allowances must be
applied before allowance components can be transferred from another
project. This is consistent with the design of the MRRT as a
project-based tax. [Section 10-10]

Example
3.1 : Order of MRRT allowances

Francis Mining Co
has a $500 million mining profit in respect of a mining project
interest in the 2012-13 MRRT
year.

Francis has MRRT
allowances totalling $190 million. The allowances are applied
in the following order:

â¢ $20 million royalty
allowance;

â¢ $10 million
pre-mining loss allowance;

â¢ $10 million mining
loss allowance; and

â¢ $150 million starting
base allowance.

The MRRT
allowances are subtracted from the mining profit, reducing the
mining profit to $310 million.

Francis’
MRRT liability is $69.75 million, worked out as
22.5% Ã $310m.

3.29
A miner must pay its assessed MRRT for the MRRT year on or before
the day on which the assessed MRRT becomes due and payable
[section
10-20] . Assessed MRRT for
an MRRT year is due and payable on the first day of the sixth month
after the end of the MRRT year and extra assessed MRRT is due and
payable 21 days after the Commissioner gives the miner notice of
the charge [section
50-5] . A miner may also be
liable to pay shortfall interest charge and general interest charge
[sections 50-10 and
50-15] . A miner must pay
instalments towards that assessed MRRT liability on a quarterly
basis during the MRRT year [Schedule 1, item 8, to the Minerals
Resource Rent Tax (Consequential Amendments and Transitional
Provisions) Bill 2011 (MRRT (CA&TP) Bill), Division 115 of
Schedule 1 to the Taxation Administration Act
1953] .

3.30
A miner will not be liable to pay MRRT for a year if the miner has
elected to use the simplified MRRT method. [Division 200]

Imposing the MRRT

3.31
The MRRT is imposed by three different imposition Bills. One
imposes MRRT to the extent that it is a duty of customs
[section 3, MRRT customs imposition
Bill] ; one imposes MRRT to the extent
that it is a duty of excise [section 3, MRRT excise imposition
Bill] ; and one imposes MRRT to the
extent that it is neither a duty of customs nor one of excise
[section 3, MRRT general imposition
Bill] . This reflects the
constitutional requirement that laws imposing duties of customs
shall deal only with duties of customs and that laws imposing
duties of excise shall deal only with duties of excise (see section
55 of the Constitution). However, there is only one
assessment Act.

3.32
The approach of enacting a single assessment Act with multiple
imposition Acts when a tax law could be a duty of customs, a duty
of excise, as well as some other type of tax, complies with the
Constitution. The same approach was followed for the
enactment of the goods and services tax legislation.

3.33
MRRT is not imposed on property belonging to a State. That
ensures that the MRRT complies with section 114 of the
Constitution, which prohibits the Commonwealth from imposing a tax
on any kind of property of a State. In practice, this will
only have an effect to the extent that a State mines its own
taxable resources. In that case, the State will not be
subject to MRRT. [Section 5 of the MRRT customs imposition Bill;
section 5 of the MRRT excise imposition Bill and section 5 of
the MRRT general imposition Bill]

Mining project interest

Share of a mining
venture to extract taxable
resources

3.34
An entity has a mining project interest to the extent that the
entity is entitled to share in the output produced by a mining
venture in which the entity participates. [Subsection
15-5(1)]

3.35
An undertaking is a mining venture if it is an undertaking or
endeavour whereby the entity, alone or together with other
entities, actively or otherwise, extracts, or plans to extract,
taxable resources from a particular area covered by one or more
production rights, with a view to producing a commodity which the
entity and the other participants in the undertaking can each
enjoy. [Subsection
15-5(3)]

3.36
If the mining venture in which the entity participates covers more
than one production right, then the entity will have a separate
mining project interest in relation to each of the production
rights to which the venture relates. [Subsection
15-5(2)]

3.37
The kinds of commodities that might be the output of such a mining
venture include iron ore and coal (produced in different forms and
to different grades to meet customer specifications), gas, or
products made from iron ore, gas, and coal, such as steel and
electricity.

3.38
The existence and extent of a mining venture is a question of
fact. That question should be determined having regard
to:

â¢
the areas from which taxable resources are extracted;

â¢
the nature of the extraction and production activities carried
out;

â¢
the degree to which these activities are conducted and operated as
financially and technically interdependent business units;

â¢
relevant contractual arrangements; and

â¢
the commodities that are produced.

3.39
Most typically, but not necessarily, a mining venture will be a
joint venture to extract and produce resource
commodities.

Example
3.2 : A vanilla joint venture

ExplorerCo enters
into a joint venture with DiggerCo (the joint venturers) to produce
coal from an area in Australia. The joint venturers hold a
production right in equal shares and are entitled to an equal share
of the resources extracted from the project
area.

The joint venture
is a mining venture. Each of the joint venturers is a
participant in that mining venture and each of them has a mining
project interest for which they will be liable to
MRRT.

3.40
The same participants may be engaged in separate mining
ventures.

3.41
Usually a participant in a mining venture would risk money,
property or skills in the venture in exchange for a right to share
in the commodity produced by the venture. It is possible,
however, that a participant may be gifted, or otherwise
transferred, a right to share in the output of the venture.

3.42
An entity is not required to have a production right to be a
participant in a mining venture.

Example
3.3 : Non-vanilla joint venture

ExplorerCo holds a production right over a
project area, from which it is entitled to extract iron
ore.

ExplorerCo does not have the required expertise
to extract the iron ore, so it enters into a joint venture with
DiggerCo to extract the resources. In return for venturing
its extraction expertise, DiggerCo receives 50 per cent of the
resources extracted from the project area. ExplorerCo takes
the other 50 per cent of the iron ore as its return on its
production right.

DiggerCo and ExplorerCo are participants in a
mining venture. They each have mining project interests and
both will be liable for MRRT.

3.43
An entity that merely provides a service or accommodation to a
mining venture would not itself be a participant in the
venture. To be a participant in a mining venture the entity
must share the risks of extracting the resources.

Example
3.4 : Finance arrangement

DiggerCo obtains a production right over an area
rich in iron ore and commences to extract the ore using funds
borrowed from Big Bank.

The terms of the loan are calculated on the
usual terms for a loan of that nature, including a commercial rate
of interest. Big Bank does not share the risks of extracting
the resources and is not itself a participant in DiggerCo’s
mining venture. BigBank does not therefore have a mining
project interest.

This would remain the case if, instead of paying
cash, DiggerCo chose to discharge its loan obligations to Big Bank
by delivering to Big Bank ore equal in value to its loan
obligations.

Example
3.5 : Mining services

MinerCo holds a right to extract coal from a
production right area, but it does not have the required expertise
to undertake the extraction activities.

MinerCo enters into a contractual arrangement
with DiggerCo whereby DiggerCo agrees to extract the resources for
MinerCo in return for a commercial fee calculated as a fixed rate
per tonne of coal it extracts for MinerCo.

DiggerCo does not share the risks of extracting
the resource and is not itself a participant in MinerCo’s
mining venture. DiggerCo does not therefore have a mining
project interest.

This would remain the case if, instead of paying
cash, MinerCo discharged its fee to DiggerCo by delivering to
DiggerCo coal equal in value to the fee.

3.44
An entity is not entitled to an output of a mining venture merely
because it is entitled to a royalty for the taxable resources
extracted by the mining venture or to a private mining royalty
comprising a share of the profits of the mining venture.
[Subsection
15-5(6)]

Example
3.6 : Profit sharing

DiggerCo has a
mining venture comprising the extraction and production of coal
from an area covered by a production right it acquired from
ExplorerCo. When DiggerCo acquired the production right from
ExplorerCo it undertook to pay ExplorerCo 10 per cent of the net
profits it makes from selling coal extracted from the production
right area.

DiggerCo has a
mining project interest and will be liable for MRRT.
ExplorerCo does not share in the output of the venture and does not
have a mining project interest.

More than one mining
venture

3.45
There may be more than one mining venture to extract taxable
resources in relation to a single production right.

Example
3.7 : Multiple mining ventures

DiggerCo and
CrusherCo have a joint venture to extract coal from a particular
area within a larger area covered by a production right they
jointly hold. They are each entitled to take an equal share
of the resources which they extract. DiggerCo and CrusherCo
are participants in a mining venture and each has a mining project
interest.

CrusherCo also has
a separate undertaking to mine another part of the area covered by
the production right (DiggerCo takes the view that mining in that
area would be too risky).

CrusherCo would be
viewed as having a second mining venture and would have a second
mining project interest comprising its right to the output of that
separate venture.

Residual mining project
interests

3.46
To the extent to which there is no mining venture to extract
certain taxable resources from the area covered by a production
right, an entity that has the right to extract the taxable
resources from the area would have a mining project interest, to
the extent of its entitlement. [Subsection 15-5(4)]

3.47
Mining project interests of this kind are a form of
‘residual’ interest. They do not exist to the
extent to which the entitlement to extract relates to resources in
respect of which there is a mining venture.

3.48
Typically, the owners of a production right will have the residual
mining project interests (if any) for particular production right
areas. It is possible, however, that such interests may be
transferred or split to one or more other entities (for example,
under a sublease). Transfers and splits are discussed in
Chapter 10.

Example
3.8 : No mining ventures to extract
resources

ExplorerCo holds a
production right over an area but it does not have any immediate
plans to commence extraction activities in that area because it has
insufficient capital to conduct such an operation. It is
currently searching for potential equity
participants.

Explorer Co would
have a residual mining project interest.

3.49
The start of a mining venture relating to the extraction of taxable
resources in respect of which an entity has a residual mining
project interest will be treated as a mining project transfer (if
the venture relates to all of the resources), or otherwise a mining
project split. These situations are discussed in Chapter
10. [Sections 120-25 and
125-35]

Acquiring a further share in a mining project
interest

3.50
If an entity that has a mining project interest because it
participates in and shares in the output of a mining venture
acquires an additional right to share in the output of the venture,
it will have a separate mining project interest that corresponds to
that further entitlement. [Subsection
15-5(5)]

Example
3.9 : Acquiring a further share

DiggerCo and
CrusherCo are participants in a mining venture with each
other. They have rights to receive and dispose of 60 and
40 per cent respectively of the resources extracted under
a production right that they jointly hold.

Subsequently,
DiggerCo decides not to continue mining in the project area and
sells its share of the venture to CrusherCo.

3.51
Similarly, if an entity that has a mining project interest because
it has an entitlement to extract taxable resources from a
particular area (a residual interest) acquires an additional
right to extract taxable resources from that area, it will have a
separate mining project interest that corresponds to that further
entitlement. [Subsection
15-5(5)]

Special rules for mining project
interests

3.52
There are circumstances in which it is possible to combine,
transfer or split mining project interests. Combinations are
discussed in Chapter 9 and transfers and splits are discussed in
Chapter 10. [Divisions 115, 120 and
125]

3.53
There are also special rules to deal with the winding down of
mining project interests and the ending of mining project
interests. The winding down and ending of mining project
interest are discussed in Chapter 11. [Divisions 130 and
135]

Production right

3.55
A production
right is any authority, license, permit or right
under an Australian Law granted by the Commonwealth, a State or a
Territory (or, in some instances, a private land owner) that
permits an entity to extract taxable resources from a particular
area in Australia [subsection 15-15(1)] .
It does not matter that the right to extract is issued subject to
environmental approval.

3.56
In deciding whether an entity has been granted the right to extract
taxable resources from an area, the term ‘extract’
should not be construed narrowly. To extract taxable
resources means to extract them by any means and would include
recovering them from the surface of the place where they
occur. [Section
300-1]

3.57
The various State and Territory Acts use different terms to
describe a ‘production right’, including ‘mining
leases’ and ‘mining licences’.

3.58
A production right should be distinguished from an authority,
license, permit or other right to prospect or explore for minerals
in a particular area or to examine the feasibility of mining in an
area. These rights are often described as ‘prospecting
permits’, ‘exploration licences’, ‘mineral
development licences’ or ‘retention
leases’. A ‘production right’ does not
include rights of this kind. [Subsection
15-15(2)]

3.59
For the purposes of the MRRT, interests in these other rights are
‘pre-mining project interests’.
[Section
70-25]

Project area

3.60
A production right authorises the extraction of taxable resources
from a particular area in Australia.

3.61
The project
area for a mining project interest that is an
entitlement to share in the output of a mining venture is the area
covered by the production right to which the mining venture
relates. [Paragraph 15-20(a)]

3.62
If the mining venture relates to more than one production right
there will be a separate mining project interest in relation to
each production right. The project area
for each of those interests will be so much of the area covered by
each of the production rights to which the mining venture
relates. [Subsection 15-5(2) and paragraph
15-20(a)]

3.63
The project
area for a residual mining project interest that is
an entitlement to extract taxable resources from an area covered by
a production right in respect of which there is no mining venture,
is so much of the area covered by the production right in respect
of which an entity is entitled to extract taxable resources.
[Paragraph
15-20(b)]

Definition of Australia

3.64
A production right that is issued in respect of an area in
Australia will result in a mining project interest.

3.65 Australia ,
when used in a geographical sense, includes:

â¢
all the external Territories (except the Australian Antarctic
Territory); and

3.67
The Australia Antarctic Territory is excluded from the MRRT
definition of Australia as no Australian law allows for production
rights to be issued in respect of this area. This is
consistent with Australia’s international obligations under
the Protocol on Environmental Protection to the Antarctic Treaty
(The Madrid Protocol), which prohibits mining within
Antarctica.

Offshore areas

3.68
The Offshore Minerals Act
1994 provides for production rights to be granted in
respect of minerals in offshore areas. To ensure mining in
such areas is covered by the MRRT, the MRRT aligns with the
definition of ‘offshore areas’ relevant for that
Act.

3.69
The Offshore Minerals Act
1994 relies on the definition of ‘offshore
areas’ in the Offshore
Petroleum and Greenhouse Gas Storage Act 2006.
Such offshore areas generally extend to the outer limits of the
continental shelf. The continental shelf, which takes its
meaning from paragraph 1 of Article 76 of the United Nations
Convention on the Law of the Sea, is either the outer edge of the
continental margin or 200 nautical miles where the continental
margin does not extend out to that distance.

3.70
Such offshore areas do not include the Joint Petroleum Development
Area [1]
or the offshore areas of the Australian Antarctic Territory.

Taxable resources

3.71
The MRRT is a tax on profits a miner makes from extracting certain
non-renewable resources. Those non-renewable
resources are called ‘taxable resources’.

3.72
The taxable
resources for the MRRT are quantities of:

â¢
iron ore;

â¢
coal;

â¢
anything produced by the in
situ consumption of coal or iron ore; and

â¢
coal seam gas extracted as a necessary incident of coal mining.

[Subsection
20-5(1)]

3.73
The terms ‘iron ore’ and ‘coal’ take their
ordinary meanings. Iron ore is rock or soil from which
metallic iron can be economically extracted. Coal is a
combustible carbonaceous material formed from deposited layers of
decomposed or decomposing vegetation.

3.74
Every form of iron ore and coal is a taxable resource. The
legislation makes no distinction, for example, between hematite and
magnetite or between black coal and brown coal.

3.75
In deciding whether something is a taxable resource, no regard is
to be had to the use to which it will be put or what will be
produced from it. [Subsection
20-5(2)]

3.76
This ensures that definitions provided by some dictionaries are not
read in an inappropriately narrow way. For example, the
Macquarie
Dictionary’s definition of iron ore, which
suggests that it usually occurs as hematite deposits, should not be
used to limit iron ore to hematite. Similarly, when it
suggests that coal is something used as a fuel, it should not mean
that coal is not coal simply because the miner or its customers
intend to use it for something other than a fuel (for example, in
making detergent).

3.77
Although ‘taxable resource’ is defined as a
quantity of iron ore,
coal, etc., it is not necessary for the quantity to be measured (or
even measurable). So long as it is some quantity, it will be
a taxable resource. [Subsection
20-5(3)]

The MRRT and gases

3.78
Most petroleum gases are not taxable resources under the
MRRT. Instead, most of them are taxed under the
Petroleum Resource Rent Tax
Assessment Act 1987 . However, there are two cases
where such a gas is a taxable resource under the MRRT. In
those cases, the gas is excluded from taxation under the Petroleum
Resource Rent Tax (PRRT).

3.79
The first case is when it is necessary to extract the gas as an
incident of a coal mining operation or in relation to a proposed
mine (say prior to construction of an underground mine). In
theory, it would be possible to tax the gas under the PRRT regime
and the coal under the MRRT regime but that would increase the
miner’s compliance costs for no significant difference in
outcome. To prevent those unnecessary compliance costs, the
gas is taxed under the MRRT, which already applies to the main
(coal mining) part of the operation. [Paragraph
20-5(1)(d)]

3.80
The most common reason why it might be necessary to extract gas as
an incident of a coal mining operation is mine safety: the
presence of coal seam gas makes a mining operation inherently more
dangerous. But there could be other reasons, such as State
legislation or environmental requirements.

3.81
Sometimes coal seam gas is drained from a potential coal mine as a
pre-mining activity. Where that drainage occurs as a
preliminary step in the actual or proposed construction of a coal
mine, then it will be a MRRT taxable resource. However, where
that gas extraction is a self-sustaining activity in its own
right, it is not an incident of coal mining or proposed coal
mining, but a separate gas extraction operation. Such gas
would not be a taxable resource under the MRRT and would be taxed
under the PRRT regime instead.

3.82
The second case involves turning coal into gas by consuming the
coal in the ground, typically by a controlled burning of the coal
(usually coal that it is not economic to mine
conventionally). This is sometimes referred to as
‘underground coal gasification’.

3.83
That gas is included under the MRRT, instead of the PRRT, to avoid
subjecting coal that is mined and then converted into gas to a
different tax regime from coal that is converted into gas before
extraction. Such a difference could distort commercial
behaviour. [Paragraph 20-5(1)(c)]

3.84
This second case is drafted widely enough to cover more than gas
derived from the in situ conversion of coal ; it covers any in situ consumption of coal or iron
ore. While consuming coal to produce gas is the only
currently known operation of this type, the legislation is intended
to cover possible future developments.

Valuation point

3.85
The valuation point is the point in the mining process that sets
the form and location of the taxable resources used for working out
what part of the proceeds of selling the resources is included in
mining revenue. The valuation point also separates upstream
activities (expenditure on which is deductible in working out the
mining profit) from the downstream activities (expenditure on which
is not deductible, although it may be relevant to working out how
much of the sale price of the resources is mining revenue).

Normal valuation point for coal and iron
ore

3.86
The usual valuation point for coal and iron ore is immediately
before it leaves the
run-of-mine stockpile. [Subsection
40-5(1)]

3.87
This means that expenditure on moving the resources to the
stockpile, and expenditure on managing and maintaining the
stockpile, is upstream of the valuation point and so will be mining
expenditure recognised in working out the mining profit.
Expenditure on moving the resources away from the stockpile will
not be mining expenditure (although it may be relevant to working
out how much of the sale price of the resources is mining
revenue).

3.88
‘Run-of-mine stockpile’ is not defined in
the legislation but is a well understood term in the mining
industry. Most mines have such a stockpile. Synonymous
terms include ‘run-of-mine pad’,
‘run-of-the-mine stockpile’,
‘ROM stockpile’ and ‘ROM pad’.

3.89
The run-of-mine stockpile is the place where the coal
or iron ore, largely in the form in which it is extracted, is
stored. Although it may have undergone preliminary crushing
for the purpose of moving it to the run-of-mine
stockpile, it will not have been subject to any beneficiation
processes.

Valuation point for coal and iron ore with no
stockpile

3.90
In some cases, coal or iron ore mines may have no
run-of-mine stockpile. The coal or iron ore might
go straight into a beneficiation process or, in the case of coal,
be transported directly to a power station. Even if the mine
does have a run-of-mine stockpile, an occasional
quantity of coal or iron ore might bypass the stockpile.

3.91
In those cases, the valuation point is immediately before the coal
or iron ore enters the first mine site beneficiation process
[paragraph 40-5(2)(a)] .
If there is no beneficiation process at the mine site, the
valuation point is instead when the resource leaves the point of
extraction [paragraph 40-5(2)(b)] .

3.92
The legislation does not define ‘beneficiation’ but it
is another term well understood within the mining industry.
It relates to the processes by which the raw coal or iron ore is
made more suitable for sale, export or use, usually by separating
it from waste material, regulating its size, and improving its
quality. It includes processes such as crushing, washing,
screening, separating and pelletising. However, it would not
include the preliminary crushing that is done for the purpose of
facilitating transportation of the coal or iron ore.

Valuation point for
gases

3.93
The MRRT taxes profits from gas that is produced by consuming coal
in situ . It
also taxes profits from gas that is extracted as a necessary
incident of coal mining.

3.94
The valuation point for those gases is when they exit the
wellhead. [Subsection
40-5(3)]

3.95
‘Wellhead’ is not defined in the legislation but is a
well understood term in the gas and petroleum industries. It
is the point at which the gas reaches the surface and enters
storage facilities or pipes for transfer elsewhere. The
wellhead typically incorporates equipment for controlling pressure
in, and regulating the flow from, the well. Because the
valuation point is when the gas exits the wellhead, expenditure on
the wellhead is upstream of the valuation point and is therefore
deductible.

Valuation point for earlier
supplies

3.96
In all these cases, it is possible (although unusual) that the
resource will be supplied to someone not involved in the mining
undertaking before it
reaches its normal valuation point. If that happens, the
valuation point is immediately before that supply.
[Subsection
40-5(4)]

Outline of chapter

4.1
This chapter outlines the concept of mining revenue in the Minerals
Resource Rent Tax (MRRT).

4.2
All legislative references throughout this chapter are to the
Minerals Resource Rent Tax Bill 2011 unless otherwise
indicated.

Summary of new law

4.3
Mining revenue is a fundamental concept in the tax as it feeds
directly into the calculation of the mining profit for a mining
project interest for an MRRT year.

4.4
The main type of mining revenue comes from consideration (or deemed
consideration) for supplying or exporting taxable resources, or
supplying, exporting or using something produced from taxable
resources. Mining revenue is the part of the consideration
attributable to the resources at their valuation point.

4.5
Other types of mining revenue include recoupments of mining
expenditure and compensation for loss or destruction of taxable
resources.

Detailed explanation of new
law

What is a miner’s mining
revenue?

4.6
Mining revenue for an MRRT year is calculated separately for each
mining project interest of the miner. [Section 30-5]

4.7
The mining revenue of a mining project interest in respect of an
MRRT year is the total of the amounts included in the mining
revenue for that interest for that year [section
30-5] . This drafting
approach is taken to facilitate the calculation of the mining
profit for a mining project interest [section
25-5] .

4.8
Broadly, a miner’s mining revenue in respect of a mining
project interest includes revenue from:

â¢
the supply or export of taxable resources extracted from the
project area for the mining project interest, to the extent the
amount relates to the resources as they were at the valuation
point;

â¢
the supply, export or use of something produced using the taxable
resources, to the extent the amount relates to the resources as
they were at the valuation point;

â¢
compensation for loss of taxable resources for the mining project
interest; and

â¢
an amount received under a take or pay contract that cannot be
related to the supply of a particular quantity of taxable
resource.

4.9
Other amounts may also be mining revenue, such as amounts arising
out of balancing adjustment events for starting base assets and
from other adjustments where circumstances change.
[Divisions 160 and
165]

4.10
An amount to be included in a miner’s mining revenue does not
include any goods and services tax payable on a supply for which
the amount is consideration (in whole or in part), or any
increasing adjustments that relate to the supply . [Section
30-75]

4.11
The same amount cannot be double counted. If the same amount
is potentially included as mining revenue under more than one
provision, it is included only once and under the most appropriate
provision . [Section 30-60]

4.12
An amount is not mining revenue unless a provision of the MRRT law
includes it in mining revenue. For instance, a hedging gain
that is separate from a supply contract is not mining revenue in
the same way that a hedging loss that is separate from a supply
contract is not mining expenditure (see Chapter 5).

Revenue from the supply, export or use of
taxable resources

4.13
An amount is included in a miner’s mining revenue if a
taxable resource has been extracted from the project area for the
miner’s mining project interest and during the year a mining
revenue event happens in relation to the taxable resource.
The taxable resource need not have been extracted by the particular
miner. [Section
30-10]

4.14
The need for a mining revenue event reflects the fact that the MRRT
applies generally to profits miners have made.
Hence, extraction of the resource, or the fact of its reaching the
valuation point, is not sufficient in itself to attract the tax in
a particular MRRT year.

4.15
Three possible mining revenue events can result in an amount
relating to taxable resources being included in a miner’s
revenue for an MRRT year . [Section 30-15]

4.16 The first way is by the
miner making an initial supply of the taxable resource prior to its
exportation or use [paragraph
30-15(1)(a)] . For example, if a
miner sold coal to an export customer on free on board terms, where
risk and title passes ‘over ship’s rail’, such a
sale would be a supply prior to export.

Example
4.1

Francis
Resources supplies 30,000 tonnes of ore to a third party in
Australia and 20,000 tonnes to an overseas purchaser by an
agreement executed at or before export. Both supplies would
be examples of supplies prior to export.

4.17
The second way is by the miner exporting resources when there has
been no initial supply at or before that time. [Paragraph
30-15(1)(b)]

Example
4.2

Francis
Resources exports 20,000 tonnes of iron ore to its storage facility
in China. It later sells the ore to a third
party.

4.18
The third way is by the miner making an initial supply of, using,
or exporting, something produced using the taxable resource if an
event has not been triggered by an initial supply or export of the
taxable resource. [Paragraph
30-15(1)(c)]

Example
4.3

Francis
Energy extracts 50,000 tonnes of coal from an MRRT project and
feeds the coal directly into a power plant for the production of
electricity, which it supplies into the wholesale electricity
market.

4.19
These mining revenue events are mutually exclusive and only one can
happen in relation to the relevant taxable resources relating to a
mining project interest of a miner. There will be one, and
only one, mining revenue event for each quantity of resources
extracted in Australia that is not otherwise consumed in mining
operations. [Section
30-15]

4.20
The approach taken is to focus on, in order, whether there has been
an initial supply of the resource and, if not, an export of the
resource, and, if neither of those, an initial supply, export, or
use of something produced using the taxable resource.

Supply

4.21
‘Supply’ has the meaning given by section
9-10 of the A New Tax
System (Goods and Services Tax) Act 1999 and subsection
995-1(1) of the Income Tax
Assessment Act 1997 , but is to be interpreted in the
context of the MRRT. In the context of the MRRT, a supply
will usually happen where the miner relinquishes title to the
resource. Generally, this will be a sale of the resource to a
third party.

Initial supply

4.22
The usual way that the revenue provisions will be triggered is by
the miner making the initial supply of the taxable resource.
[Paragraph 30-15(1)(a)]

4.23
The initial
supply of a taxable resource extracted under the
authority of a production right is generally the initial supply
that a miner makes after it has extracted the taxable
resources . [Subsection
30-20(1)]

4.24
An initial supply must be a supply of taxable resources made by a
miner who has a mining project interest that relates to the taxable
resources. Typically, therefore, it would not include a
supply made by the owner of the resource in situ (unless the owner is also a
miner).

4.25
A supply is not an initial supply if it does not result in a change
in the ownership of the taxable resource. For instance, if a
miner blends a quantity of iron ore from one of its mining project
interests with iron ore from another of its mining project
interests, the blending will not constitute a supply; only once the
blended ore is sold would there be an initial supply . [Paragraph
30-20(2)(b)]

4.26
The concept of an initial supply is also subject to an exception
relating to supplies made between participants in the course of an
undertaking that is a mining venture. This mainly affects
joint venture arrangements. [Paragraph 30-20(2)(a)]

4.27
The exception ensures that, if a supply of taxable resources is
made between participants in a mining venture, and the supply is
made in the course of that venture, the supply is not an initial
supply. The initial supply would be the next supply of those
resources.

Example
4.4

X Co and Y Co
are participants in a joint venture undertaking where X Co
undertakes the extraction activities and Y Co the blending
activities. Each takes a share of the resulting
resource. The joint venture undertaking is a mining
venture. The supply of the resource from X Co to Y Co (giving
Y Co possession) is not treated as an initial supply of the
resource as it occurred in the course of the joint venture
undertaking.

Example
4.5

Taking the
facts in Example 4.4, if, after the extraction and blending
activities have occurred and the respective shares of X Co and Y Co
determined, X Co sells its share in the resource to Y Co, this
supply is not excepted because it did not occur in the course of
the joint venture undertaking. So, that sale would be the
initial supply of the resource.

Example
4.6

In a separate
situation, Extractor Co extracts the resource and sells it to
Blender Co who blends it and sells it to third parties. The
sale to Blender Co is the initial supply.

4.28
A supply is not excepted from being an initial supply if it is made
between participants in separate undertakings.

Example
4.7

Taking the
facts in Example 4.4, a supply by X Co to a participant in another
mining venture in which X Co is also a participant would be an
initial supply. That is because it would not be a supply
between participants in the course of a single mining venture; it
would be a supply between participants in two different mining
ventures. It would make no difference if the separate mining
ventures both relate to the same production
right.

4.29
When a supply occurs, the time of the supply is taken to be the
earliest of when consideration for it is received or becomes
receivable, when the resource is delivered, and when ownership
passes in the resource . [Section 30-35]

4.30
However, if consideration for the supply is received or becomes
receivable at a time before 1 July 2012, the time of the supply is
taken to be the earliest of when the resource is delivered, and
when ownership passes in the resource . [Schedule 4, item 2 to the Minerals
Resource Rent Tax (Consequential Amendments and Transitional
Provisions) Bill 2011 (MRRT (CA&TP)
Bill)]

Export

4.31
If the miner exports the taxable resource from Australia before
there has been an initial supply, the export will trigger a mining
revenue event. [Paragraph
30-15(1)(b)]

4.32
The word ‘export’ is not defined. It takes its
ordinary meaning of sending the resource to another country for
sale or exchange, or merely taking the resource out of Australia
with the intention of landing it in another country.

4.33
In general, a miner ‘exports’ resources if they are
exported while the miner has ownership or title to them.

4.34
The miner ‘exports’ the resource even if there are
arrangements to facilitate the export of the resource which are
carried out for, or on behalf of, the miner by a third party.

4.35
Similarly, the miner ‘exports’ the resource even if the
miner is not actually responsible for the exporting
activities. The time of ‘export’ determines
whether it (or a supply that occurs at the same time or earlier) is
the relevant mining revenue event. [Paragraph
30-15(1)(b)]

4.36
Export occurs when the resource finally clears Australia’s
territorial limits (which will usually be its coastal
waters). Merely leaving the final Australian port is not
sufficient to constitute export.

4.37
The usual case of export will be where there has been no sale or
other arrangement in relation to the resource when it leaves
Australia. For example, a miner will export resources when it
transfers them to one of its overseas branches.

4.38
More complicated cases can arise where a transaction has occurred
prior to the resource leaving Australia. In those cases it
must be determined whether the relevant mining revenue event is the
initial supply or the export.

4.39
A sale under which ownership passes at the port or while the ship
is in Australian waters is dealt with under the ‘initial
supply’ test, not the ‘export’ test. So,
for instance, sales of coal or iron ore using
free-on-board or cost-insurance-freight
will usually be dealt with under the ‘initial supply’
test.

4.40
In this regard, it should be noted that, while an initial supply
does not occur until ownership passes in the resource, the time of
that supply may be earlier if consideration is received or
receivable or the resource is delivered. The time of the supply is the earliest
of these things. For example, if a miner is entitled to
invoice a customer once the resource crosses the ship’s rail,
that point will be the time of supply. Alternatively, if the
point at which the consideration is received or receivable has not
arrived but the miner has delivered the resource to an agent of a
customer for transport to a destination outside Australia, that
point will be the time of supply. [Section 30-35]

4.41
If title does not pass in the resource until after it leaves
Australian coastal waters, and consideration for a supply has not
yet been received or become receivable, and there has not yet been
a delivery of the resource, the export test will apply.

Example
4.8 : When export is the relevant mining
revenue event

Redrock Resource
Co. sells iron ore to an export customer under terms that pass
title in the ore at the destination port. Title to the ore
passes on delivery of the ore at the destination but, if
consideration is received or receivable before then, the supply
will be taken to have occurred at that earlier time. If that
is before the ore is exported (that is, before it leaves
Australia’s territorial waters), the relevant mining revenue
event will be the supply. If consideration is received or
receivable only when the ore reaches the destination port, the
relevant mining revenue event will be the export.

Use

4.42
The ‘use’ of something produced from the taxable
resource is a revenue event if an event has not already been
triggered by an initial supply or export of the taxable resource or
thing. [Paragraph
30-15(1)(c)]

4.43
There is no mining revenue event for the ‘use’ of the
resource itself, as opposed to the ‘use’ of something
produced from it. For example, if coal is burned to produce
electricity, it is the use of the electricity rather than the coal
that triggers the mining revenue event.

4.44
If, however, the miner uses the thing produced from the resource in
carrying on mining operations or transformative operations (for
example, if the miner uses electricity in it mining operations that
it has produced from coal it extracts), the use of the electricity
is not treated as a mining revenue event .
That is because the consumption of the electricity is not an
expenditure and will not, therefore, give rise to a
deduction. [Subsection 30-15(2)]

4.45
‘Use’ takes its ordinary meaning in the context of the
MRRT.

Working out the amounts to be included in a
miner’s revenue

4.46
The amount to be included in a miner’s revenue for a
particular mining revenue event that has happened is determined
through a two-step process:

â¢
first, the ‘revenue amount’ for the mining revenue
event is determined (Step 1); and

â¢
second, so much of the revenue amount as is reasonably attributable
to the taxable resource in the form and place the resource was in
when it was at its valuation point (Step 2). This amount is
worked out using the most appropriate and reliable measure of that
amount.

[Subsection
30-25(1)]

4.47
The two-step process ensures that the profits that are brought to
tax under the MRRT law will be profits that relate to the resources
in the form and the place they were in when they were at their
valuation point. The MRRT law does not seek to tax profits
from operations conducted downstream of the valuation point.
[Section 1-10]

4.48
Price increases in the taxable resource that occur after the
resource has passed the valuation point and which are reflected in
the consideration realised by the miner for selling the resource or
things produced using the resource (or which would have been
realised if the miner had sold the resource or the thing produced
instead of exporting or using it) will be captured as mining
revenue. Conversely, price decreases after the valuation
point that are reflected in the consideration realised by the miner
(or would have been if there had been a supply) will reduce the
amount of mining revenue.

4.49
Although the legislation does not prescribe the use of any
particular method for attributing the revenue amounts, the method
used must produce the most appropriate and reliable measure of the
amount, having regard to, amongst other things, the functions
performed, assets employed and risks assumed by the miner across
its value chain and the information that is available.
[Subsection
30-25(3)]

4.50
There are also a number of statutory assumptions which must be
made, but only to the extent to which they are relevant in applying
the method that is the most appropriate and reliable method.
The assumptions are that the things done by the miner in carrying
on its downstream mining, transformative and resource marketing
operations (as applicable) are done by a distinct and separate
entity that does not own the taxable resource and which deals
wholly independently with the miner in a competitive market for the
things done. [Subsection
30-25(4)]

4.51
There is also a safe-harbour method which, if chosen by the miner,
is taken to give the most appropriate and reliable measure of the
amount to be attributed. [Subsection
30-25(5)]

Arm’s length principles and
methodologies

4.52
The arm’s length principle plays an important role in
determining amounts to be included in a miner’s mining
revenue.

4.53
The arm’s length principle requires that the profits derived
by an enterprise should be consistent with the profits that the
enterprise would have derived had its commercial and financial
dealings been consistent with the commercial and financial dealings
that independent enterprises would have had in comparable
circumstances.

4.54
The arm’s length principle can apply at three points:

â¢
to test whether the revenue amount for a supply is an arm’s
length amount [Division
205] ;

â¢
to impute a revenue amount where the mining revenue event is the
export of a taxable resource or the export or use of something
produced using a taxable resource [subsection 30-25(2), items 2 and 3 in
the table] ; and

â¢
to work out how much of a revenue amount is attributable to a
taxable resource as at its valuation point [subsection
30-25(3)] .

4.55
The Organisation for Economic Co-Operation and Development (OECD)
has provided guidelines for the application of the arm’s
length principle using arm’s length methodologies. The
OECD Guidelines are titled the OECD Transfer Pricing Guidelines for
Multinational Enterprises and Tax Administrations (OECD
Guidelines ).

4.56
The methods outlined in the OECD Guidelines were developed to
assist tax administrations and multinational enterprises deal with
cross-border transfer pricing of transactions. Regard
may be had to the OECD Guidelines, adapted as appropriate, for the
MRRT law.

4.57
Arm’s length methodologies that may be relevant in applying
the MRRT law, alone or in combination, and as direct or indirect
methods, include the comparable uncontrolled price method, the
cost-plus method, the resale price method, the transactions net
margin method and profit-split methods. These methods
are outlined in more detail in Chapter 17 in the context of the
anti-profit shifting rules.

4.58
In some cases other methods, not described in the OECD Guidelines,
but which are consistent with the arm’s length principle, may
produce a result which is the most appropriate and reliable
method.

4.59
Because the working out of the mining revenue starts with the
revenue amount, this is discussed first, and then there is a
discussion about how the revenue amount should be attributed to the
taxable resource as at the valuation point.

Determining the revenue
amount

4.60
There are two broad categories of mining revenue events for which
revenue amounts must be determined: actual supplies, and
imputed supplies for exports of resources and dealings in things
produced from resources. [Subsection
30-15(1)]

Supplies

4.61
Where the mining revenue event is a supply, the revenue amount will
be the actual consideration received or receivable for the
supply. [Subsection 30-25(2), item 1 in
the table]

4.62
An amount that is not actually paid to a miner is taken to be
received by the miner if and when it is applied or otherwise dealt
with on behalf of the miner or as the miner directs.
[Section 30-70]

4.63
The consideration received or receivable could be adjusted if the
anti-profit shifting rules apply. [Division
205]

4.64
In effect, the revenue amount operates as a ‘cap’ on
the amount that can be attributed to the taxable resources,
ensuring that only realised profits of the miner can be brought to
tax.

Imputed supplies

4.65
In the remaining revenue events there is no actual
transaction. An arm’s length consideration is worked
out instead.

4.66
Where the mining revenue event is an exportation of the resource or
a thing produced from the resource, the revenue amount is the
amount that would be the arm’s length consideration if the
miner had supplied it at the time and place the taxable resource or
thing is loaded for export . [Subsection 30-25(2), item 2 in the
table]

4.67
Where the mining revenue event relates to the use of a thing
produced from the taxable resource, the revenue amount is the
amount that would be the arm’s length consideration if the
miner had supplied the thing at the time and place of the
use. [Subsection 30-25(2),
item 3 in the table]

Meaning of arm’s length
consideration

4.68
The arm’s length
consideration for a supply is the amount that the
miner would reasonably expect to receive if, instead of exporting
or using the resource or a thing produced from the resource, it had
sold the resource or thing to another entity with which it was
dealing wholly independently . [Subsection
30-30(1)]

4.69
The taxpayer must use the most appropriate and reliable method to
determine the arm’s length consideration. Regard must
be had to all the miner’s relevant circumstances,
including:

â¢
the characteristics of the resource at the point of export or
use;

â¢
a functional and factual analysis of the economically significant
activities undertaken by the miner in its mining operations and, if
relevant, its transformative and resource marketing operations;

â¢
market conditions;

â¢
the miner’s market strategies;

â¢
the terms and conditions of arrangements entered into; and

â¢
the degree of comparability that exists between the controlled and
the uncontrolled dealings or between enterprises undertaking the
dealings, including all the circumstances in which the dealings
took place and whether adjustments can and should be made.

[Paragraph
30-30(2)(a)]

4.70
Regard, must also be had to the availability, coverage and
reliability of data necessary to apply particular methods.
[Paragraph 30-30(2)(b)]

4.71
For these purposes, the concept of mining operations is broadly
defined. Mining operations are all those activities or
operations that are ‘preliminary or integral to’ or
‘consequential upon’ extracting or producing taxable
resources for sale or export or for producing taxable resource to
be applied in producing some other thing for sale, export or use
[section
35-20] . A detailed explanation
of mining operations is in Chapter 5.

4.72
Transformative operations are those activities and operations that
involve the application of taxable resources in the production of
some other thing that is subject to a mining revenue event when
sold, exported or used. [Subsection
30-25(6)]

4.73
Resource marketing operations are operations or activities involved
in marketing, selling, shipping and delivering taxable resources
(or things produced using taxable resources) that are sold or
exported. [Subsection
30-25(7)]

4.74
The most appropriate and reliable method must produce an
arm’s length result that is reasonable and makes sense on a
commercial basis in all the circumstances of the miner and its
dealings in taxable resources or (things produced from taxable
resources).

4.75
If, however, it is not possible to work out the arm’s length
consideration, the revenue amount is the amount that is fair and
reasonable in the opinion of the Commissioner of Taxation
(Commissioner). [Subsection 30-30(3)]

Determining how much of the revenue amount is
attributable to the taxable resource

4.76
Having ascertained the revenue amount, the task is then to
determine how much of that amount is reasonably attributable to the
taxable resources in the condition and place they were in when they
were at the valuation point.

4.77
If there is an initial supply of the taxable resources just after
the valuation point [subsection 40-5(4)]
the whole of the mining revenue amount will be reasonably
attributable to the resources at the valuation point and the mining
revenue amount will, subject to the application of the
anti-profit shifting provisions, correspond with the
consideration received or receivable for the supply.

4.78
In other cases, the revenue amount must be attributed to the
taxable resources using the method that produces the most
appropriate and reliable measure of the amount. That method
must be chosen having regard to:

â¢
the circumstances of the miner, including a functional and factual
analysis of the economically significant activities undertaken by
the miner in its mining operations and, if relevant, in its
transformative and resource marketing operations; and

â¢
the availability of reliable information needed to apply the
selected method or methods.

[ Subsection
30-25(3)]

General approach

4.79
Revenue amounts will be attributable to taxable resources to the
extent to which the resources, and the activities involved in
getting them to the valuation point in the condition they were in
at the valuation point, are the factors that have, in substance,
generated the revenue amounts.

4.80
To work out when this is the case, a functional and factual
analysis of the economically significant functions performed,
assets used, and risks assumed by the miner across its entire value
chain would be required. [Paragraph
30-25(3)(a)]

4.81
This is the same analysis that is required when working out the
revenue amount for taxable resources (and things produced from
taxable resources) that are exported before they are sold or
used. [Section
30-30]

4.82
The next step would be to allocate those functions, assets and
risks across the miner’s value chain — that is upstream
and downstream of the valuation point. Only objectively
relevant and material circumstances need to be taken into
account.

4.83
Obviously the allocation of functions, assets and risks between two
parts of what is a single value chain poses conceptual and
practical difficulties.

4.84
One approach to the problem would be to construct a hypothetical
separate and independent entity fitting the circumstances of the
downstream operations (being the downstream mining operations,
transformative operations and resource marketing operations).

4.85
On this approach the downstream operations would be
considered in the context of the miner’s overall operations
and certain dealings between the hypothetical entity and the miner
may be hypothesised. For example, it may be hypothesised that
the downstream entity provides services to the miner.

4.86
Once a separate entity has been hypothesised it becomes simpler to
apply standard arm’s length methods. Those methods can
be applied to all of the notional entity’s activities,
including its dealings with other entities and its hypothesised
dealings with the miner.

4.87
This is broadly the approach adopted by the OECD for attributing
profits to a ‘permanent establishment’ of a
non-resident enterprise: the profits to be attributed to the
permanent establishment are the profits that the permanent
establishment would have earned at arm’s length if it were a
separate and independent enterprise engaged in the same or similar
activities under the same or similar conditions. Treating the
permanent establishment as a separate entity focuses attention on
the economically significant activities performed by the permanent
establishment and the way it interacts with the broader
enterprise.

4.88
Having allocated the functions, assets and risks between the
upstream and downstream, the most appropriate and reliable method
should be chosen. The choice should be informed by the
functional analysis and, amongst other things, by reference to:

â¢
the characteristics of the resource at the point of supply or
equivalent;

â¢
the terms and conditions of arrangements entered into by the
miner;

â¢
the degree of comparability that exists between controlled and
uncontrolled dealings or between entities undertaking the dealings,
including all the circumstances in which the dealings took place
and whether adjustments can and should be made;

â¢
the nature and extent of any assumptions that must be made; and

â¢
the availability of reliable information needed to apply the
selected method.

[Subsection
30-25(3)]

Statutory assumptions

4.89
The MRRT law includes certain assumptions which must be used to the
extent to which they are relevant to the application of a
particular method. [Subsection
30-25(4)]

4.90
The statutory assumptions are that:

â¢
a distinct and separate entity (the notional downstream entity)
does all the things (including using all the assets) that the miner
actually does in carrying on the downstream operations;

â¢
the downstream entity does not acquire any interest in the taxable
resource; and

â¢
the downstream entity and the miner deal wholly independently with
one another under competitive market conditions.

[Subsection
30-25(4)]

4.91
These assumptions are assumptions about the nature of the
downstream operations and the functions performed, the assets
employed and the risks assumed in those operations. As such,
it would be expected that the assumptions would be relevant to any
method that requires (or takes into account, expressly or
implicitly) a valuation of the downstream operations (for example,
where a deductive method is used to netback from the revenue
amount).

4.92
Such assumptions would not, however, be relevant in applying
methods that do not rely on things that happen in the downstream
operations. For example, where there is a comparable
uncontrolled price for the taxable resource at the valuation
point.

Distinct and separate independent entity
assumption

4.93
As discussed above, the assumption that the things done by the
miner downstream of the valuation point are done by a distinct and
separate entity dealing wholly at arm’s length with the miner
establishes a basis for the use of arm’s length methods to
determine an appropriate price or value for those things.
[Paragraphs 30-25(4)(a) and
30-25(4)(c)]

4.94
Specifically, arm’s length methods may assist in working out
what the miner would have paid a separate entity to do those
things.

4.95
The separate entity assumption only applies to the things done by
the miner in carrying on its downstream mining, transformative and
resource marketing operations. It does not apply to things
done by separate entities from whom the miner has procured
services.

X Resources Pty
Ltd contracts Y Mining Services Pty Ltd to crush and screen the
iron ore it extracts from its iron ore mine. X Resources pays
Y Mining Services $15 million for these services. While the
crushing and screening activities constitute mining operations for
X Resources’ mining project interest, and the service fee
represents expenditure incurred by X Resources in carrying on those
operations, the things done by Y Mining Services are not things
that are taken to have been done by X
Resources.

The separate
entity assumption only applies to the things done by
X Resources in procuring the mining services from Y Mining
Services Pty Ltd.

Resource assumption

4.96
The MRRT law is a resource rent tax. The underlying principle
is that risks relating to the value of the taxable resource are
borne upstream of the valuation point [2] .

4.97
Consistent with this, an arm’s length method cannot be used
if it relies on an assumption that the notional downstream entity
has acquired an interest in the resource. [Paragraph
30-25(4)(b)]

4.98
A hypothesis that the notional downstream entity acquired the
resource would produce an unreliable measure of the profits
attributable to the taxable resources and could result in resource
rents arising from price changes occurring after the resource
passes the valuation point, but before the revenue event, being
attributed downstream.

Competitive market
assumption

4.99
The assumption of a competitive market for the provision of the
downstream operations, transformative operations and resource
marketing operations carried on by the notional downstream entity
ensures that resource rents cannot be attributed downstream as a
result of the assumed exercise of market power by the separate
entity.

4.100
In a competitive market the notional downstream entity would be
expected to make a return sufficient to induce an entity to enter
the market to do the things the entity is taken to have done.
The return would be commensurate with the non-diversifiable risks
borne in doing those things and would be no more or less than would
be sufficient to justify the continued commitment of that
capital. [Paragraph
30-25(4)(d)]

4.101
A non-diversifiable risk is a systematic or market risk that cannot
be diversified away. For example, the risk that an asset
could become stranded may be non-diversifiable to the extent that
the stranding results from market wide events such as a reduction
in demand associated with changes in movements in interest rates or
changes in commodity prices. Such risks (including any
non-diversifiable risks associated with the resource) should be
compensated for in the returns that the notional downstream entity
would make.

4.102
Characteristics of a competitive market that are relevant in
determining the amounts that a miner would pay a separate entity to
provide downstream operations are freedom of entry and the presence
of many potential service providers, none of whom individually can
affect price. Freedom of entry implies that costs can be
recovered, if it were otherwise this would increase the risk for
new entrants and so deter entry.

4.103
A comparable uncontrolled price for the provision of downstream
operations is unlikely to be appropriate where the price reflects
the exercise of market power by the provider.

Possible methods

4.104
As discussed above, there are different methods that may, depending
on the miner’s circumstances, alone or in combination,
provide an appropriate and reliable method for working out the
miner’s mining revenue. The method that is used should
be the method that is the most appropriate and reliable
method. [Subsection
30-25(3)]

4.105
Although the attribution methodology requires a reasonable
attribution to be made of a revenue amount, this does not mandate a
‘net back’ from the revenue amount although this is
likely to be the most reliable method in many cases.

4.106
Arm’s length methodologies that may be relevant include the
comparable uncontrolled price method, the cost-plus method, the
resale price method, the transactions net margin method and
profit-split methods. There may be others.

4.107
For example, to the extent to which there are comparable transfers
of taxable resources in the form the resources were in when they
were at their valuation point, between unrelated parties in
comparable markets, then a comparable uncontrolled price, as at the
time of the mining revenue event, and adjusted for any material
differences, would be an appropriate and reliable method.

Example
4.10 : Comparable uncontrolled price at the
valuation point

An independent
enterprise sells iron ore of a similar type, quality and quantity
at the same time and the same stage of the production chain as
those produced by the taxpayer. Assuming no other material
differences, the price received by the independent iron ore
producer, as at the time of the mining revenue event, would be
considered a comparable uncontrolled price.

4.108
In many cases, however, a netback from the mining revenue event to
the valuation point is likely to be the most appropriate and
reliable method.

4.109
In a netback, the revenue amount would be reduced for the
arm’s length value of the downstream operations that
reasonably relates to the resources (or the things produced from
taxable resources). The residual amount would be the mining
revenue.

4.110
Applying a netback approach would support neutrality in the
application of the MRRT law to miners who ‘buy in’
their downstream operations and those who provide them
‘in-house’.

4.111
To the extent to which the miner carries on its downstream
operations in-house, a net back could be undertaken by reference to
the price that a hypothetical service provider would seek to
recover for providing those operations to the miner on an
arm’s length basis.

4.112
A miner that adopts this approach should value the downstream
operations using the most appropriate and reliable method.
This could be using a comparable uncontrolled price for equivalent
downstream operations or worked out by reference to the
miner’s actual operating and capital costs (for example, by
applying an arm’s length cost-plus or transactional net
margin method).

Daly Resources Pty
Ltd performs all of the crushing, processing and transporting of
the ore it extracts from its iron ore mine before it is
exported. These are the only downstream activities undertaken
before the ore is sold.

Daly Resources
observes that there are other iron ore miners in the same region
that procure comparable crushing, processing and transporting
services from independent service providers. The market for
the services is a competitive market.

Having regard to
the prices charged by those service providers, Daly Resources
determines that it would need to pay $18 million to procure the
same crushing, processing and transporting activities as it
directly carries out itself. The $18 million is a comparable
uncontrolled price being a price arrived at having regard to the
comparable activities performed by parties dealing independently
with one another under materially the same
circumstances.

During the same
year Daly Resources obtains $40 million from selling the iron
ore. It would be reasonable to include $22 million in Daly
Resource’s mining revenue ($40m -
$18m).

4.113
Where the miner procures its mining operations from a third party
then, assuming those operations are procured on an arm’s
length basis, the amounts paid for the mining services would form
the basis for the net back. Allowance would also be made for
the functions performed by the hypothetical separate entity in
procuring and administering the service contracts.

X Resources Pty
Ltd contracts Y Mining Services Pty Ltd to perform all downstream
mining operations leading to the export of the ore it extracts from
its iron ore mine. During the MRRT year starting on
1 July 2012, X Resources pays $15 million to Y Mining Services
to conduct the downstream mining activities. X Resources
deals with Y Mining Services on an arm’s length
basis.

X Resources also
incurs costs in managing its contract with Y Mining Services.
During the same year, X Resources derives consideration of $35
million from exporting the iron ore. The revenue that is
reasonably attributable to the ore as at the valuation point for
the year is $35 million less the $15 million paid to Y Mining
Service and an arm’s length charge for the procurement
functions actually performed by the miner in its downstream
operations.

4.114
If the miner procures services from a third party on a
non-arm’s length basis then, unadjusted, the amounts paid for
the mining services would not form the basis of an appropriate or
reliable net back method (note, also, the potential application of
the anti-profit shifting rules in Division 205).

4.115
A full net back from the revenue amount may not be the most
appropriate and reliable method for a vertically integrated
transformative operation (for example, the production of
electricity or steel). However, a netback from the point at
which the mining operations end and the transformative operations
commence may be appropriate and reliable if there are comparable
uncontrolled prices for the sale of the resources in the form they
are in when they are first applied to the transformative
operations.

E Energy Pty Ltd
owns and operates a coal fired power station. It supplies the
power station with coal from its own coal mine. It also
acquires coal, of similar quality and in similar quantities, on an
arm’s length basis, from other miners who have mines near E
Energy’s mine.

Assuming no other
material differences, the price that E Energy pays for the coal
from the other miners would be a comparable uncontrolled price for
the coal it has mined itself.

E Energy also
finds a way of working out the arm’s length value of its
processing and transporting operations. For example, it may
be able to find a comparable uncontrolled price for those
services. Alternatively, a cost-plus or transactional net
margin method may provide an appropriate and reliable method for
pricing those services.

In these
circumstances, it would be reasonable for E Energy to work out its
mining revenue by taking the comparable uncontrolled price for its
own coal (adjusted to the date that the coal is stockpiled at the
power station) and reducing it by the arm’s length value of
its own downstream processing and transporting operations (being
those operations that are downstream of the valuation point but
which end when the coal arrives at the power
station).

The residue would
be an amount that is reasonably attributable to the coal when it
was at the valuation point (to the extent it does not exceed the
revenue amount).

4.116
Another possible method is a profit-split method. A
profit-split method, is a method that takes a combined profit and
splits it on an economically valid basis that approximates the
division of profits that would have been anticipated between
independent enterprises. This economically valid basis may be
supported by independent market date (for example, uncontrolled
joint-venture agreements) or by internal data.

4.117
Profit-split methods are only available to be used if they are the
most appropriate and reliable measure of the revenue amount to be
attributed to the taxable resource at its valuation point.

4.118
When the supply chain is not highly integrated, the importance of
the mining rights and the upstream mining operations relative to
the downstream would tend to favour the use of other methods over a
profit-split method.

4.119
However, the position may be different in the case of a highly
integrated operation, such as a transformative coal to electricity
generation.

4.120
In applying a profit-split method in the context of the MRRT law,
it would be expected that the mining rights, and the capital
contributed in the upstream and downstream, would provide a more
appropriate bases for analysing a split of profits as compared to
other bases, such as operating costs. That is because of the
capital intensive nature of the mining industry and the significant
value attributable to mining rights.

4.121
Although capital contributed would be reasonably observable, the
value of mining rights increase and decrease with variations in
commodity prices.

Example
4.14 : Profit split ratio

A profit-split
calculation, for attributing revenue amounts, could be based on the
ratio: mining right value plus upstream capital asset values/mining
right value plus upstream and downstream capital asset
values

Safe-harbour method

4.122
To improve certainty and reduce compliance costs, the MRRT law
provides a safe-harbour method for working out how much of the
revenue amount is attributable to the taxable resource at the
valuation point. If the method is chosen by a miner, it is
taken to be the most appropriate and reliable method.
[Subsection
30-25(5)]

4.123
There may be circumstances in which the safe-harbour method would
be the most appropriate and reliable method in any event (that is,
without recourse to the safe-harbour provision).

4.124
The method takes the revenue amount and reduces it by an amount
that, having regard to the required assumptions (including the
arm’s length dealings assumption, the resource assumption and
the competitive market assumption), the miner’s circumstances
and the available information, is sufficient for the notional
downstream entity to recover the costs of the operations it is
taken to have carried on such as reasonably relate to the taxable
resource (or things produced from the taxable resource).

4.125
The costs that the notional downstream entity can recover are:

â¢
its operating costs;

â¢
any depreciation of the assets used in those operations; and

â¢
a cost of capital sufficient to justify the continued commitment of
the capital it employs in those operations.

[Paragraph
30-25(5)(a)]

4.126
This is a method that is commonly used to set prices for access to
infrastructure and related services. It adopts a
‘building block’ approach. It excludes from
mining revenue the amounts the service provider would need to
recover, over the long run, to meet the costs of those investments
(where the costs of an investment includes a return on capital that
is commensurate with the [3] non-diversifiable
risks).

4.127
Applied in the MRRT context, the method works out a competitive
price for the operations taken to have been provided by the
notional downstream entity. To the extent to which those
operations reasonably relate to the production of taxable resources
(or things produced from taxable resources), the revenue amount for
those resources (or things) will be reduced accordingly.

4.128
There may be a number of different ways of working out the extent
to which the downstream operations reasonably relate to taxable
resources (or things produced from taxable resources) in relation
to which there have been mining revenue events. For example,
it may be reasonable to work out an average price, per tonne, for
the iron ore produced and transported in a year. That price
could be applied to each quantity of resource that is sold,
exported or used in that year.

4.129
The mining revenue cannot be a negative amount.

4.130
The costs which the notional downstream entity should be able
to recover can be expressed as follows:

4.131
The notional downstream entity’s operating costs would be the
non-capital, arm’s length, costs of the downstream
operations. These costs would generally include maintenance
costs (although see further discussion below). [Subparagraph
30-25(5)(a)(i)]

4.132
Depreciation would be the amounts required to compensate the
notional downstream entity for the consumption of the assets used
in its operations due to physical or economic loss. It would
be expected that the amount of depreciation would be worked out
having regard to the economic life of the asset, which may, in
turn, depend on the expected life of the mining operation.
The amount of the depreciation will be a recovery of the capital
value of the asset over its expected remaining operating
life. [Subparagraph
30-25(5)(a)(ii)]

4.133
The choice of depreciation profile under this approach (for
example, straight line or annuity) should be consistent with a
reasonably stable path of service charges, consistent with what an
independent service provider would set in a competitive market.

4.134
The cost of capital would be the opportunity cost of the capital
used to finance the notional entity’s downstream operations
(that is, the return on capital required to attract the
capital). It would be expected that the cost of capital would
be worked out by applying a weighted average cost of capital to the
assets used in the downstream operations, being a rate that is
consistent with prevailing market conditions, adjusted for the
non-diversifiable risks (also known as systematic risks) involved
in those operations, and weighted by the proportions of equity and
debt used to fund those operations. [Subparagraph
30-25(5)(a)(iii)]

4.135
In order to work out depreciation amounts and cost of capital
amounts, a capital value for downstream assets is required.
For new assets, the most appropriate value will be the cost of
acquisition or installation. For existing assets, a market
valuation based on an approach that is consistent with the method
used to value starting base assets should be used (albeit subject
to the operation of the competitive market assumption).

4.136
There are a number of different approaches for working out the
capital value of assets. Methods commonly used include
depreciated actual cost, depreciated optimised [4]
replacement cost, optimised replacement cost or full replacement
cost.

4.137
The question as to which is the most appropriate method for valuing
assets in a particular case will depend on the circumstances of the
assets, the notional entity, and the industry and on the other
assumptions made.

4.138
The three integers — operating costs, depreciation and costs
of capital — are interdependent. Their combined
operation should ensure that the service provider is not over- or
under-compensated, over time. Assumptions made in working out
one integer will generally affect the other.

4.139
For example, the operating costs that could be recovered should be
commensurate with the assumptions made in valuing the asset.
That is, it would not be appropriate to recover the full costs of
maintaining an old asset if the assets have been valued, as new, at
full replacement cost. Nor would it be appropriate to
recognise any capital expenditure on assets valued at full
replacement cost other than where the expenditure expands or
improves the functionality of the asset. That is because the
expenditure would already be reflected in the replacement cost of
the asset.

4.140
Replacement cost should not be used where it exceeds market
value. If the cost of replacing an asset is more than the
cost of a cheaper alternative, an owner would not replace it.
For example if, say, a rail transport asset is underutilised and/or
the mine it services has limited remaining economic life, a
valuation based on the net present value of the cost of
transporting the resource by road would be appropriate if this
option is cheaper than replacing the existing rail asset.

4.141
In valuing downstream assets, discounted cash flow methods should
generally not be used. That is because those methods require
assumptions to be made about the service charges for the use of the
assets. In effect, the service charge is the thing that the
statutory method is trying to determine.

Example
4.15 : What a miner would pay a distinct and
separate entity

Katherine Mining
Pty Ltd installs an iron ore crusher ready for use from 1 July 2011
and commences crushing ore from the run-of-mine pad.
Katherine Mining determines that its operating costs in performing
this activity are $700,000 in
2012-13.

The cost of the
crusher was $2 million and its effective life is 25 years, so in
determining the capital costs the separate entity would incur,
Katherine Mining determines an amount of $80,000 for depreciation
of the crusher for that year. The return on capital invested
in the crusher would be worked out having regard to the risks the
separate entity would incur and the assumption that there is a
competitive market for the provision of the crushing services to
Katherine.

Katherine Mining
determines that a pre-tax return on the capital invested in the
crusher of 13 per cent would be sufficient for a separate entity to
continue to employ its capital in that
undertaking.

Katherine Mining
determines the amount that it would pay a distinct and separate
entity to provide ore crushing services in 2012-13 to
comprise the operating costs, depreciation and the return on
capital as determined above: a total of $1,029,600 ($700,000
operating costs plus $80,000 depreciation and $249,600 return on
the depreciated cost of the crusher). The sum of this and the
amounts Katherine Mining pays, or would pay, for other downstream
operations, reduces the revenue amount for the sale of the iron ore
that will be included in its mining revenue.

4.142
Any costs associated with a particular operation that relate to
operations that are not taken into account in working out the
revenue amount should be added back. [Paragraph
30-25(5)(b)]

Example
4.16 : Costs not reflected in the revenue
amount for a supply

Assume there is a
supply of taxable resources at a port in Australia but the miner
incurs the costs of carriage and insurance. Further assume
that the miner invoices the purchaser for these costs separately
from the resources.

The miner would be
required to add back any costs that relate to the things it did in
delivering and insuring the resources.

Example
4.17 : Costs not reflected in the revenue
amount for resources exported

Assume a miner
exports coal to an offshore customer. Title to the resources
passes on delivery and the miner bears the cost of carriage and
insurance.

The revenue amount
is the amount for which the miner would have sold the coal had it
sold it at the time the coal was loaded for export. Assume
the miner sells coal of the same quality (and in similar
quantities) to other customers on free on board terms and uses the
price of that coal to work out the revenue amount for the coal it
has exported.

The miner would be
required to add back any of its costs that relate to the things it
did in delivering and insuring the
resources.

â¢
amounts that do not relate to a particular taxable resource
[section 30-55] .

Recoupments and
offsets

4.144
Mining revenue includes amounts that recoup or offset mining
expenditure of the mining project interest. It does not
matter whether the recoupment was received or receivable by the
miner who has the interest or by one of its associates. It
also does not matter whether the expenditure recouped arose in the
past or will arise in the future. This ensures that mining
expenditure is only recognised to the extent that the miner
actually bears the economic cost of that expenditure.
Treating recoupments of future expenditure in the same way avoids
the need to track each recoupment against a particular amount of
expenditure. [Subsection 30-40(1)]

Example
4.18 : A subsidy recoups mining
expenditure

Lawrie Longwall
Mining (Lawrie) receives a government subsidy for expenditure
it incurs in employing apprentices to work on its mining project
interest. The cost of employing the apprentices is mining
expenditure, so the recoupment by way of the subsidy is mining
revenue.

Example
4.19 : Sale of emissions units recoups
mining expenditure

O’Toole Coal
purchased 5,000 emissions units sufficient to offset Co 2
emissions attributable to upstream mining operations. It paid
$125,000 ($25 per unit) for the units and included this amount in
its mining expenditure in its 2017 MRRT year. However, it
only needed to surrender 3,000 units to offset its 2017 carbon
emissions. In 2018, O’Toole Co sold 2,000 units for
$46,000 (at $23 per unit). The recoupment of this mining
expenditure is mining
revenue.

4.145
A recoupment is not included in mining revenue if the amount gives
rise to an adjustment. As the adjustment rules deal with such
recoupments, this ensures the amount is not double counted.
[Paragraph 30-40(1)(c)]

4.146
Where an amount is received that recoups an expenditure that is
only partly deductible, the proportion of the recoupment included
in mining revenue matches only the proportion of the expenditure
that is deductible. [Subsection
30-40(2)]

Example
4.20 : Recoupment is only partly for
upstream expenses

Continuing Example
4.18, if Lawrie’s costs in employing apprentices were
incurred 60 per cent for upstream mining operations and
40 per cent for downstream mining operations, only 60 per
cent of the costs would be mining expenditure, so only 60 per cent
of the subsidy would be mining revenue.

4.147
An amount received or receivable before the start of the MRRT that
recoups or offsets mining expenditure is included in mining
revenue. [Schedule 4 to the MRRT
(CA&TP) Bill, item 3]

4.148
Amounts that recoup or offset a liability that gives rise to a
royalty credit will normally reduce royalty credits [section
60-30] . However, if there
are insufficient royalty credits to reduce, the excess recoupment,
grossed-up by the MRRT rate, is included in mining revenue
[section 30-45] .

Compensation for the loss of taxable
resources

4.149
A miner who obtains, or whose associates obtain, an amount of
insurance, compensation or indemnity relating to the loss,
destruction or damage of an extracted taxable resource or something
produced from it, must include mining revenue to the extent that,
if the compensation had been consideration for a supply, it would
have been included, as mining revenue. [Section 30-50]

4.150 This reflects the fact that,
from the miner’s perspective, compensation amounts for the
loss, destruction or damage of resources is equivalent to
consideration for supplying them.

4.151
Amounts included as mining revenue are limited to compensation for
loss, destruction, or damage of resources after
1 July 2012 and before there has been a mining revenue
event for the resources. Resources that were lost, destroyed
or damaged before 1 July 2012 would not have generated
mining revenue, so compensation for their loss or destruction would
similarly not be mining revenue [Schedule 4 to the MRRT (CA&TP) Bill, item
4] . Resources lost, destroyed or
damaged after their mining revenue event will already have
generated an amount of mining revenue, so treating the compensation
as mining revenue would be double counting. [Section 30-50]

Amounts that do not relate to a particular
mining revenue event

4.152
Amounts received or receivable by a miner for the supply, or
proposed supply, of taxable resources that do not reasonably relate
to a mining revenue event for a particular quantity or quantities
of taxable resources are treated as mining revenue.
[Section 30-55]

4.153
Typically, this will occur where a purchaser makes a scheduled
payment under a take or pay contract but does not take delivery of
any resources.

Example
4.21 : Take or pay contract

X Energy Co entered into a long-term
supply contract to pay for a fixed annual quantity of coal from New
Resources Pty Ltd, whether or not X Energy takes delivery of that
quantity of coal. For the year beginning 1 July 2012, X
Energy pays the fixed annual amount, but, because of reduced demand
for energy from its coal-fired power station, X Energy takes
delivery of only ¾ of the coal contracted for and it obtains a
credit that can be applied to future coal
deliveries.

New Resources
treats ¾ of the payment as a revenue amount that must be
attributed to the coal that was supplied and the balance as an
amount which must be included directly in mining
revenue.

New Resources
would not have to include any further amount in its mining revenue
if it later has to supply the remaining ¼ of the coal to X Energy
(although there would be a change in the circumstances relating to
the payment included directly in mining revenue such as may warrant
an adjustment under Division 160).

Expenditure causing revenue to be
received

4.154
An amount that would otherwise be included in mining revenue in
respect of a mining project interest is reduced to the extent that
the miner necessarily incurred the expenditure in enforcing the
miner’s entitlement to receive the amount, provided that the
expenditure:

â¢
does not relate to any other amount;

â¢
was not mining expenditure for the mining project interest; and

â¢
was not excluded expenditure.

[Section
30-65]

4.155 This ensures that the mining
profit for a mining project interest properly reflects the net
mining revenue and mining expenditure for the
interest.

4.156
For example, if litigation costs incurred in seeking compensation
for damages to taxable resources are not mining expenditure, they
would reduce the mining revenue for the mining project interest
from which the resources were extracted.

Summary of new law

5.3
A miner’s mining expenditure for a mining project interest
includes expenditure necessarily incurred in carrying on mining
operations upstream of the valuation point. However, such
expenditure is specifically excluded if it is:

â¢
a cost of acquiring an interest in a mining project interest;

â¢
a royalty (other than some private mining royalties);

â¢
a cost of finance;

â¢
a payment under a hire purchase agreement;

â¢
capital expenditure on non-adjacent land or buildings for
administrative or accounting activities;

â¢
hedging or currency losses;

â¢
a rehabilitation bond or trust payment

â¢
a payment of income tax or goods and services tax; or

â¢
a unit shortfall charge.

Detailed explanation of new
law

Mining expenditure

5.4
Mining expenditure is a fundamental concept because it feeds
directly into the calculation of a miner’s mining profit for
a mining project interest in respect of a Minerals Resource Rent
Tax (MRRT) year and therefore its total MRRT liability for an MRRT
year. [Sections
10-1 and 25-5]

5.5
The mining expenditure for a mining project interest is the sum of
all the amounts that are included as mining expenditure for the
interest for an MRRT year. [Subsection
35-5(1)]

5.6
An amount is only included in mining expenditure once, under the
most appropriate provision. [Section
35-25]

General test for mining
expenditure

5.8
A miner’s mining expenditure for a mining project interest
includes expenditure to the extent that it is necessarily incurred
by the miner in carrying on upstream mining operations in respect
of that mining project interest. [Section 35-10]

5.9
Unlike income tax, it does not matter whether the expenditure is of
a revenue or a capital nature. All expenditure that satisfies
the nexus to upstream mining operations is deductible as mining
expenditure when incurred. This approach is consistent with
the ‘cash flow’ nature of rent taxes. [Subsection
35-10(2)]

Expenditure

5.10
‘Expenditure’ is a word with several meanings. In
the MRRT context, ‘expenditure’ refers to disbursement
of an amount of money (except where the non-cash benefit rules
apply). The term is often coupled with a timing rule, such as
‘incurred’. In these cases, the expenditure would
occur when the timing rule is satisfied.

5.11
‘Expenditure’ does not include the consumption of
assets, which is another possible meaning of the word. An
asset that has been consumed or lost will already have led to an
amount of mining expenditure at the time it was purchased for use
in upstream mining operations.

5.12
For example, if explosives are included in mining expenditure at
the time of purchase, then the value of those explosives is not
included in mining expenditure when they are used because that
would double count the miner’s costs.

5.13
In addition, because miners get an upfront deduction for capital
expenditure, there is no depreciation (except in the case of
starting base assets). Indeed, if miners were to depreciate
their assets, the expenditure would be counted twice — once
at the time of purchase, and again over the life of the
asset.

Necessarily incurred ... in carrying
on

5.14
The words ‘necessarily incurred ... in carrying on’ are
familiar to business taxpayers as they are integral to the general
income tax test for deductibility (see section 8-1 of the
Income Tax Assessment Act
1997 (ITAA 1997)). These words are judicially well
tested and therefore provide a high degree of certainty regarding
the deductibility of expenses. The words have been
consciously chosen in preference to the approach to deductibility
that is a feature of the Petroleum Resource Rent Tax (PRRT) regime
and which has given rise to disputes about whether expenses are
deductible or not.

5.15
The approach adopted by the courts in interpreting and applying
these words in the income tax context is appropriate for MRRT
purposes. This means that, if expenditure is reasonably
capable of being seen as desirable or appropriate from the point of
view of the pursuit of upstream mining operations, it is mining
expenditure.

5.16
While there must be a nexus between an expense and upstream mining
operations in order for the expense to be mining expenditure, the
requirement for expenditure to be necessarily incurred does not
impose a narrow test or a test of logical or inescapable
necessity. The Courts have developed a pragmatic approach to
interpreting these words.

Example
5.1 : Approach to deductibility

Wildfire Coal, a
UK resident, has Australian mining operations. After
negotiation with a local authority, Wildfire pays for the
construction and ongoing maintenance of a community aquatic centre
at a township established to provide housing and community
facilities for the workforce for its mine. While the aquatic
centre is for the use of the whole community, it is primarily for
use by the miner’s employees. The expenditure on the
construction and maintenance of the aquatic centre is an important
part of ensuring that it has the workforce that it requires to
carry on its operations. The expenditure is incurred as a
matter of practical operational necessity and so is mining
expenditure to the extent that it is for employees engaged in
upstream mining operations.

5.17
However, this does not mean that all expenditure necessarily
incurred in carrying on a business that includes the production of
a taxable resource is deductible. This is a resource rent
tax, not an income tax — not all revenue is assessable,
and not all expenditure is deductible. Expenditure must be
sufficiently connected to upstream mining operations and not the
business more generally. Only expenditure that has the
necessary relationship with upstream mining operations is included
in mining expenditure.

Example
5.2 : Expenses incurred in carrying on a
business

Continuing the
previous example, Wildfire Coal decides to list on the ASX and
incurs costs associated with listing. While these costs may
have a connection with Wildfire Coal’s business, they do not
have the appropriate connection with upstream mining operations and
so are not mining expenditure.

5.18
Importantly, the words ‘necessarily incurred ... in carrying
on’ have proven flexible over time. They are capable of
dealing with new situations.

Example
5.3 : Expenses incurred in meeting
environmental obligations

Craig Mining Co
owns and operates an iron ore mine in the Pilbara. During the
2013-2014 MRRT year, it emits 20,000 tonnes of Co 2 in
carrying on its upstream mining operations. It is therefore
required to purchase and surrender 20,000 emission units to meet
its obligations under the Clean Energy legislation. The
expenditure is necessarily incurred in carrying on upstream mining
operations and so is included in mining
expenditure.

Upstream mining
operations

5.19 Upstream
mining operations are mining operations to the
extent that they relate directly to finding and extracting a
taxable resource from the mining project area for the mining
project interest. Any activity or operation directed at doing
anything to, or with, the taxable resource after it reaches the
valuation point is not an upstream mining operation. [Section 35-15]

5.20
Extracting the taxable resource incorporates all those activities
necessary to free the taxable resource from its in situ location, and so would
include recovering resources from the surface of the land,
excavating an open cut pit, and digging a traditional underground
mine.

5.21
Also included are activities that are preliminary to extraction,
such as exploration, and activities undertaken as a consequence of
extraction, such as getting taxable resources to their valuation
point. This would include any initial crushing to make it
possible to move the resources to the valuation point, building the
road that links the miner to the run-of-mine stockpile, and buying
and maintaining the trucks used for the transport.

5.22
Some particular things that could qualify as upstream mining
operations are:

â¢
negotiations with native title holders as part of the process of
obtaining a production right over the project area;

â¢
exploring for taxable resources in the project area;

â¢
crushing and weighing taxable resources before they reach their
valuation point;

â¢
head office activities, to the extent that they contribute to
getting taxable resources to their valuation point;

â¢
planning and constructing facilities, and acquiring and maintaining
plant and equipment, for use in processing taxable resources before
they reach their valuation point;

â¢
upgrading computer software used in processing taxable resources
before they reach their valuation point; and

â¢
rehabilitating a project area from damage caused by exploring,
extracting and moving taxable resources to their valuation
point.

5.23
Some activities may be carried on outside the mining project
area.

Example
5.4 : Activities remote from the mine
site

Wildfire Coal has
automated some activities for producing and handling taxable
resources before the valuation point. These are
electronically controlled by operators working in a dedicated
operations facility located away from the project area in a capital
city. The provision and operation of the facilities are
upstream mining operations.

Example
5.5 : Training upstream staff

Wildfire Coal
employs staff at its head office in a capital city whose duties
include the initial induction and training of all new mine site
employees. These activities may be carried out at the mine or
in the capital city. The activities are upstream mining
operations to the extent that they relate to the capacity of
personnel to carry on upstream mining operations.

Example
5.6 : Mine planning in a capital city

Wildfire Coal
employs staff at its head office in a capital city whose duties
include life-of-mine planning. These activities are carried
out in the capital city, but in liaison with personnel at the mine
site. The mine planning activities are upstream mining
operations as they are activities integral to undertaking the
mining activities.

Example
5.7 : Consultants researching new extraction
processes

Wildfire Coal has
engaged consultants to examine and evaluate new extraction
processes for use in the planned expansion of production volumes of
its taxable resources in relation to its mining project
interest. The research takes place in various locations
around the world as well as on the site of the mine
concerned. The research is an upstream mining activity as it
is preliminary and integral to extracting the taxable
resources. Upstream mining operations may be
carried out before or after the taxable resource reaches the
valuation point so long as they otherwise have the required
relationship to the extraction of the resource and getting it to
the valuation point.

If Wildfire has
several mining project interests, or some mines not subject to the
MRRT, the costs of research that was relevant to all of them would
have to be apportioned.

5.24
Activities directed at preparing the mine site are upstream mining
operations.

Example
5.8 : Preparatory activities

Wildfire Coal
holds a production licence and will be conducting activities to
produce taxable resources from the project area. In
developing the mine, it decides to prepare part of the project area
for use as a run-of-mine stockpile. This includes
earthworks to level and provide access to the
run-of-mine stockpile site and drainage work to ensure
that any run-off from the run-of-mine stockpile
does not contaminate local waterways. These activities are
upstream mining operations.

5.25
Activities directed at expanding a mine are upstream mining
operations. For example, exploration may be undertaken within
the area of a production right in order to define and clarify the
exact location and extent of a taxable resource within a mining
project area. As this informs decisions made about the
operation of the mine in order to extract the taxable resource, it
is an upstream mining operation.

Example
5.9 : Exploration within a project area

Wildfire Coal
produces taxable resources from an established mine and wants
to expand production from the mining project area. It
undertakes drilling to clearly establish the boundaries of the
existing ore body within the project area. The drilling is an
upstream mining operation.

5.26
Some activities that take place after a mine stops producing
taxable resources are upstream mining operations.

Example
5.10 : Mine site rehabilitation and
restoration

Wildfire Coal
carries out rehabilitation activities on an area from which taxable
resources have been recovered by open cut mining. These
activities are a consequence of extracting the taxable resources
and so are related to extracting those resources. Therefore,
the activities are upstream mining operations.

Example
5.11 : Mine site rehabilitation and
restoration

Wildfire Coal
operates a tailings pond to contain water drained from the coal
mine it operates and for which it has a mining project
interest. The water is removed from the mine to allow for the
extraction of the coal and to maintain mine safety. After the
mine closes, Wildfire Coal drains and backfills the tailings pond
to restore the site. These restoration activities are
upstream mining operations.

Example
5.12 : Mine site rehabilitation and
restoration

When restoring its
mine site, Wildfire Coal removes conveyor belt systems used to
transport coal from the coal face to the run-of-mine
stockpile. This is an upstream mining
operation.

Mining operations

5.27
The MRRT defines mining
operations to include all activities or operations
that are ‘preliminary or integral to, or consequential
upon’ extracting or producing taxable resources, or producing
something else using those taxable resources.
[Paragraph
35-20(1)(a)]

5.28
However, mining
operations do not include doing anything to, or
with, taxable resources after they reach the form and location they
are in when a mining revenue event happens to them, or they are
first applied to producing something in relation to which a mining
revenue event happens. [Paragraph
35-20(1)(b)]

5.29
Mining operations therefore include those things that are directly
involved in production, as well as those things that the miner does
before the commencement, and after the cessation, of those
operations. Things done as a matter of practical need to
facilitate or enable that production are also included .

5.30
Some activities and operations are specifically identified as
mining operations for a mining project interest for the purposes of
clarifying the scope of the general definition and removing doubt
in some cases of particular concern. This does not limit what
is included under the general definition . [Subsection 35-20(2)]

5.31
The specific activities are:

â¢
exploration or prospecting for taxable resources in the project
area for the mining project interest;

â¢
extracting taxable resources from the project area;

â¢
doing anything to, or with, taxable resources recovered from the
project area before they reach the form they are in when a mining
revenue event happens to them;

â¢
obtaining access to the project area for mining operations;

â¢
acquiring, constructing or maintaining anything to be used in the
above activities;

â¢
rehabilitating the project area affected by any of the above
activities;

â¢
closing down any of the above activities; and

â¢
activities done in furtherance of these activities.

[Subsection
35-20(2)]

5.32
An activity is an activity done in ‘furtherance’ of the
other activities specified if it is, from a practical and business
point of view, directed at facilitating or enabling those
activities to be carried on. However, the idea of an activity
done in furtherance of another activity does not extend to
activities that have only a remote or temporal connection with a
listed activity. For instance, obtaining an ASX listing,
while an activity that, in a remote sense, furthers the mining
activities, would be too remote a connection to be part of the
upstream mining operations.

5.33
The definition of ‘exploration or prospecting’ comes
from section 40-730 of the ITAA 1997 and therefore
includes activities such as geological mapping, geophysical
surveys, systematic searching for areas containing minerals, and
searching by drilling within those areas. It includes
searching for ore within, or near, an ore-body by drives,
shafts, cross-cuts, winzes, rises and drilling. It
further includes conducting feasibility studies to evaluate the
economic feasibility of mining minerals once they have been
discovered, and obtaining mining or prospecting information
associated with the search for, and evaluation of, areas containing
minerals. [Section 300-1,
definition of ‘exploration or
prospecting’]

Example
5.13 : Exploring and prospecting

Pick and Shovel Co
holds a mining project interest in Western Australia from
which it extracts iron ore. Pick and Shovel conducts a search
for additional iron ore near the ore body and within the project
area. The search is part of the mining operations for the
mining project interest.

Incurring mining
expenditure

5.34
The MRRT operates on an accruals basis. Mining expenditure is
therefore deductible in the year that it is incurred. This
aligns with the treatment of deductible expenditure under the
ITAA 1997 and under the PRRT.

Example
5.14 : Contractor performing services

Wildfire Coal
engages Upstream Coal Services (Upstream) in June 2013 to perform
activities that would be upstream mining operations. Under
the agreement, Wildfire is to pay Upstream after the work is done
and invoiced. Upstream performs its contractual obligations
in July 2013 and immediately issues a tax invoice. Wildfire
incurs this expense in the 2013-2014 MRRT year and can
therefore include the amount charged for Upstream’s services
in its mining expenditure for that year.

Example
5.15 : Joint venture funds

Pick & Shovel
Co is the operator of an iron ore mine on behalf of joint
venturers, SingCo, SangCo, and SongCo. At the start of each
month, Pick & Shovel provides an estimate of expenditure for
the following month, and makes a cash call to the joint venturers
for their share of the estimated monthly expenditure. The
cash call simply puts Pick & Shovel in funds.
It does not procure the carrying on of any operations.
Any pecuniary liabilities incurred by Pick & Shovel as joint
venture operator, so far as they relate to the other joint
venturers’ shares, are mining expenditure for each of SingCo,
SangCo, and SongCo because Pick & Shovel is acting as their
agent.

Apportioning mining
expenditure

5.35
An asset can be used both in upstream and downstream mining
operations and staff can perform functions that are relevant to
both upstream and downstream mining operations. Costs may
also relate to more than one mining project interest, or to taxable
resources and non-taxable resources. Only the part of
the expenditure incurred in the upstream operations related to
taxable resources is mining expenditure and deductible against
mining revenue. Expenditure that also serves other purposes
must be apportioned. Expenditure that is for multiple mining
project interests must be apportioned between them.
[Subsection
35-10(1)]

5.36
The words ‘to the extent’, which are also familiar to
taxpayers through their frequent use in income tax law, support the
apportionment of costs. [Subsection
35-10(1)]

Example
5.16 : Activities partly for upstream mining
operations

Wildfire Coal uses
a loader to maintain the run-of-mine stockpile and to load ore onto
vehicles for transport to the next stage of processing. The
use of the loader will be an upstream mining operation to the
extent that it is used to maintain the stockpile. Its use
will not be an upstream mining operation to the extent that it is
used to load the ore for transport away from the stockpile.
Therefore, its cost and the costs of operating and maintaining it
must be apportioned between its upstream and downstream
roles.

Pinder & Sons
owns and operates a coal mine in the Illawarra region of New South
Wales. Both its upstream and downstream mining operations
emit significant amounts of
Co 2 .

Pinder & Co
acquires 1,000 hectares of land in Tasmania at a cost of $1 million
to grow forests and generate emission units to meet its emission
liabilities. Based on initial estimates, Pinder & Co will
only need 300 hectares of the forest to offset the emissions
generated by the upstream operations of its coal mine.
Therefore, Pinder & Co will include $300,000 in its mining
expenditure.

5.37
Apportionment of mining expenditure must be on a fair and
reasonable basis. What will be fair and reasonable is
essentially a question of fact to be determined in each case and
could include using a proxy, such as revenue, production volumes,
direct costs, labour costs, or head counts.

Example
5.18 : Apportioning between taxable and
non-taxable resources

Wildfire Coal
operates a coal mine in north Queensland. The mine can only
be accessed for six months of the year due to the wet season.
The company also operates a copper mine in southern
Queensland. Wildfire purchases a fleet of 10 dump trucks for
use in its coal mine, to transport coal to the valuation
point. When the wet season comes, they move the dump trucks
south to work in the copper mine.

The trucks spend
50 per cent of their time in the coal mine and
50 per cent of their time in the copper mine. The
total cost of the dump trucks was $5,000,000. The miner must
apportion this expenditure between its coal operation and its
copper operation. The miner may only claim $2.5 million
as mining expenditure.

Example
5.19 : Apportioning head office costs

Wildfire Coal
operates two coal mines and one nickel mine in Queensland. It
does not engage in any other commercial
activities.

During the year,
Wildfire receives $200 million revenue from each of its coal
mines and $70 million from its nickel mine. The operating
expenditure for each of the coal mines is $80 million, of which
$20 million is upstream of the respective valuation
points. The total operating expenditure for the nickel mine
is $160 million.

Wildfire also
incurs $37 million of costs at its Head Office in
Brisbane. These costs relate to:

ASX
Listing............................................... $1
million
Interest....................................................... $4
million
Private royalties....................................... $5
million
Business development............................ $5 million
Political donations................................... $1
million
Investor Relations................................... $1
million
Human Resources................................... $10
million
Management............................................ $5
million
Office lease............................................... $5
million

The ASX listing
fee, investor relations and political donation costs would not
qualify as mining expenditure as they do not have the necessary
connection with the coal operations. To the extent to which
the interest and private royalties relate to the coal operations,
they would be excluded expenditure. The business development
costs relate to researching potential acquisition targets of coal
and other mining projects in and out of Australia. These
costs would not be deductible for MRRT purposes on the basis that
they were not incurred in respect of a mining project interest or
pre-mining project interest and therefore do not have the
necessary connection with the coal operations.

The remaining $20
million of human resources, office lease and management expenditure
has the necessary connection with the mining operations but needs
to be apportioned using a two-step process: firstly
across the three mining operations, and secondly between upstream
and downstream, each on a fair and reasonable
basis.

Step 1

One basis for
undertaking the first step of allocating the human resources,
office lease and management expenditure to each of the three mines
may be to use a reasonable estimate of the headcount of employees
at each of the mines. A split based on total costs of each of
the three mines could also be appropriate.

Another may be to
allocate the expenditure to each of the three mines based on the
proportion that the operating costs of each of the coal mines ($80
million each) bears to the total operating costs of the three mines
($320 million). In this case, that would result in the coal
mines each being allocated 25 per cent of the costs (or $5 million
each). The $10 million that relates to the nickel mine would
never be MRRT expenditure, as nickel is not a taxable
resource.

On the facts of
this case, an allocation of the human resources, office lease and
management expenditure to the three mines based on the proportion
that the revenue or profits from each of the coal mines bears to
the total mining revenue of the mines may not be reasonable.
That is because Wildfire’s revenue and profit margin from its
coal mines is disproportionately large compared to its profit
margin from its nickel mine. Revenues and profits may not
therefore be an accurate proxy for working out the purpose for
which the expenditure was incurred.

Step 2

Once the cost
allocation has been made to each of the mine sites, it still needs
to be split between upstream and downstream. This could be
done using the proportion of upstream/downstream costs as a
proportion of total costs at each mine. On this basis, the $5
million allocated to each coal mine above would then be split $1.25
million to upstream and $3.75 million to downstream, as 25 per cent
of each coal mine’s costs are upstream in this example.
Upstream costs of the two mines would be MRRT expenditure and the
downstream costs may be taken into account in determining the MRRT
revenue.

Other amounts of mining
expenditure

5.38
Amounts may be included in mining expenditure when there is an
adjustment to the use of an asset used in upstream mining
operations. For example, if half the cost of an asset was
mining expenditure when acquired, based on an expected 50 per cent
use each in the upstream and downstream operations of a mining
project interest, a later decision to use it fully in the
interest’s upstream mining operations would lead to a further
amount of mining expenditure. This is discussed in Chapter
13. [Division 160]

Excluded expenditure

5.39
Certain expenditure is specifically excluded from mining
expenditure because of the general design of the MRRT while others
are excluded because of the way the MRRT is intended to interact
with various claims to the resource right. These are:

â¢
costs of acquiring rights and interests in projects;

â¢
royalties;

â¢
financing costs;

â¢
hire purchase payments;

â¢
costs of non-adjacent land and buildings used in
administrative or accounting activities;

â¢
hedging losses and foreign exchange losses;

â¢
rehabilitation bond and trust payments;

â¢
payments of income tax or GST; and

â¢
unit shortfall charge.

[Subsection 35-5(2)
and Subdivision 35-B]

Cost of acquiring rights and interests in a
project

5.40
An amount of expenditure is excluded expenditure to the extent it
relates to:

â¢
acquiring an interest in a production right covering an area,
unless the expenditure is in relation to the grant of the
production right [subsection
35-35(1)] ;

5.41
Deductions for expenditure incurred in acquiring rights or
interests in projects are excluded for reasons of tax
symmetry.

5.42
If a miner sells its right or interest in a project it is not
required to include the sale proceeds in its mining revenue (if it
were, tax would be imposed on the capitalised value of the future
profits). Accordingly, the acquirer of the right is not
entitled to a deduction for any consideration paid to acquire the
right (or any costs associated therewith).

5.43
However, the same issue does not arise with respect to expenditure
incurred in association with the initial grant of a right.
Hence, expenditures such as government fees and legal expenses paid
in relation to the grant of a right are deductible.

When something is granted

5.44
Something is ‘granted’ when it is bestowed or
conferred. The word ‘grant’ has historically been
used to refer to situations in which governments bestow property
rights upon citizens (and other entities). It has not
generally been used to describe the transfer of rights. It
has been used here because the types of situations envisaged
involve governments granting exploration and production
rights. Generally, such rights can only be granted
once. After they have been granted, they may be sold, but not
granted again.

5.45
However, more than one right could be granted over the same
area. For example, an exploration right may lapse and a
government may grant a new right. It is appropriate that
expenditure associated with such a subsequent grant be included in
mining expenditure; it is not a transfer of an existing mining
right.

Royalties

5.47
Mining royalties are discussed in detail in Chapter 6, which is
about allowances.

Private mining royalties

5.48
A private mining royalty is a payment in the nature of a royalty to
another person not made under a Commonwealth, State or Territory
law. It could be a payment in kind rather than in cash.
Private mining royalties are usually calculated by reference to a
percentage or share of the gross or net value of the taxable
resource, or by reference to a quantity of taxable resource (or of
some product form or component of it) [subsection 35-45(2)] .
Examples of private mining royalties include:

â¢
payments to a party other than under a Commonwealth, State or
Territory law for access to the land (sometimes called
‘private override royalties’); and

â¢
payments under resource profit sharing arrangements.

5.49
Private mining royalty arrangements differ from government imposed
royalties in that they are, in substance, profit sharing agreements
in respect of the exploitation of a resource, rather than a price
the owner earns for selling the resource.

5.50
Private mining royalties are excluded in order to avoid the need to
assess individual royalty recipients against their share of a
project’s proceeds, which would be necessary if such payments
were deductible.

5.51
This approach is consistent with the treatment of private royalties
under the PRRT.

5.52
However, a private mining royalty payment is not excluded
expenditure if:

â¢
it is given to a contractor for services that form part of upstream
mining operations for a mining project interest and does not
represent a share of the miner’s profits [subsection 35-40(2)] .
Such expenditure is more appropriately described as a fee for
services, rather than as a private mining
royalty ;

â¢
it is paid to an entity under an agreement entered into with the
entity before 2 May 2010 and at a time when the entity is a State
or Territory body (other than an ‘excluded STB’ within
the meaning of section 24AT of the Income Tax Assessment Act 1936 ,
which would include a municipal corporation, public educational
institution, public hospital, or superannuation fund)
[subsection 35-40(3)] .
Where these arrangements were entered into prior to 2 May 2010, the
miner would not have had the opportunity to take into account the
MRRT in striking the relevant agreement; or

â¢
it is made, by way of consideration for the carrying on of mining
operations in the project area, to native title holders, registered
native title claimants, or a person that holds rights arising under
an Australian law dealing with the rights of Aboriginal persons or
Torres Strait Islanders in relation to land or waters that relate
to the project
area
[subsection 35-40(4)] .

Example
5.20 : Royalties paid to State or Territory
bodies

Voltage Power Co
(a State body) operates a coal-fired electricity generation
plant. It holds a mineral development licence over an area of
land with significant coal deposits. Prior to 2 May 2010, it
enters into an agreement with Ready, Willing & Able Co, a
mining company, to develop part of the coal deposits, with a view
to having some of the coal supplied to Voltage Power Co’s
electricity plant, and the balance sold into export markets.
Voltage Power Co consents to Ready, Willing & Able Co applying
for a mining lease over the relevant part of Voltage Power
Co’s licence area, in consideration of Ready, Willing &
Able Co entering a contract to supply coal at fixed prices to
Voltage Power Co, and also paying a royalty on the export coal
sales.

The payments are
mining expenditure for Ready, Willing & Able Co because they
are the price of obtaining access to the coal deposits, and hence
necessarily incurred in carrying on upstream mining operations for
the mining project interest. Although the payments of a share
of mining revenues are private mining royalties, and therefore
would normally be excluded expenditure, they are not excluded
expenditure here because they are paid to Voltage Power Co, a State
or Territory body, under an agreement entered into before 2 May
2010.

Example
5.21 : Private mining royalties and native
title holders

Wildfire Coal
negotiates an Indigenous Land Use Agreement (the Agreement) with a
native title group under the Native Title Act 1993 . The
Agreement is registered. In accordance with the Agreement,
the native title group agrees to the granting of mining tenure over
a part of their land, and to allow Wildfire Coal to access and mine
that land. Wildfire Coal agrees to provide a benefits package
that includes a lump sum payment, a share of mining revenues,
scholarship and apprenticeship programs, payments relating to
heritage protection and environmental management, and the provision
of community infrastructure.

These payments by
Wildfire Coal in accordance with the Agreement are necessarily
incurred in carrying on upstream mining operations and so are
mining expenditure. Although the payments of a share of
mining revenues are private mining royalties, they are not excluded
expenditure because they are paid to a native title holder in
consideration for carrying on mining operations on its
land.

5.53
Private mining royalties paid to a State or Territory body, or to a
native title holder or claimant, that are not excluded
expenditures, will be deductible if they satisfy the general
expenditure test and irrespective of whether they are paid to
acquire an interest in production right or a mining project
interest. [Subsection
35-40(5)]

Financing costs

5.54
Financing costs and associated payments are not deductible under
the MRRT. Broadly, the types of costs excluded include the
principal and interest on a loan, borrowing costs, dividends,
capital returns, trust and partnership distributions, and the costs
of issuing membership interests in entities. This is
consistent with the treatment under the PRRT. [Section 35-50]

5.55
Financing costs are excluded because the purpose of the MRRT is to
tax profits arising from the non-renewable resource that is
extracted and those profits should not depend on the way in which a
miner chooses to finance its operations.

5.56
Capital invested in upstream operations is instead recognised
through immediate deductibility and an ‘uplift’
allowance to maintain the value of losses for activities upstream
of the valuation point. Downstream operations are effectively
recognised through the process of attributing the revenue to the
resource at the valuation point.

5.57
Allowing a deduction for financing costs would therefore amount to
a double deduction for the cost of capital unless financiers were
also subject to the MRRT on their returns from their financing
activities. It would also distort investment and production
decisions, creating a bias towards debt financing instead of equity
financing.

5.58
Three types of financing costs are excluded.

Financial arrangement

5.59
Expenditure incurred in relation to an arrangement that gives rise
to a financial arrangement is excluded expenditure.
‘Arrangement’ and ‘financial arrangement’
take their meaning from the ITAA 1997 (see subsection 995-1(1) of
the ITAA 1997). For these purposes a ‘financial
arrangement’ is defined to mean an arrangement under which an
entity has a legal or equitable right to provide and/or
receive a financial benefit that is cash settlable.
[Paragraph
35-50(a)]

Equity interest

5.60
Expenditure incurred in relation to an ‘equity
interest’ that is a financial arrangement is also excluded
expenditure, as is expenditure incurred in relation to is a scheme
that gives rise to an equity interest issued by the miner.
[Paragraphs 35-50(b) and
(c)] .

5.61
‘Equity interest’ is defined in the ITAA 1997
(see subsection 995-1(1) of the ITAA). Broadly, an
entity holds an equity interest if the return on the interest is
linked to the economic performance of the entity in which the
interest is held.

Hire purchase
agreements

5.62
Hire purchase agreements are treated as if they are debt funded
property purchases. Therefore, any payment made in relation
to a hire purchase agreement is excluded expenditure.
[Subsection
35-55(1)]

5.63
A miner who enters into a hire purchase arrangement for property
with an arm’s length party will be taken to have acquired the
property for the amount shown in the agreement as the cost or value
of the property. [Paragraph
35-55(3)(a)]

5.64
If the parties are not dealing at arm’s length, or if the
agreement does not specify a cost or value for the property, the
miner will be taken to have acquired the property for the amount
that could reasonably be expected to have been paid by the miner
for the purchase of the property had the hirer actually sold the
property to the miner at the start of the agreement, and the
parties had dealt with each other at arm’s length.
[Paragraph
35-55(3)(b)]

5.65
The cost of the property is taken to have been incurred, and the
asset is deemed acquired, when the property is supplied to the
miner. [Subsection
35-55(2)]

5.66
The result is that the deemed acquisition cost could be mining
expenditure, in the same way as it could be if the miner had
actually bought the property, but the actual payments made under
the hire purchase agreement are excluded expenditure.

5.67
It is important to note that these rules apply to hire purchase
agreements entered into before 1 July 2012 [Schedule 4 to the Minerals Resource Rent Tax
(Consequential Amendments and Transitional Provisions) Bill 2011
(MRRT (CA&TP) Bill), item
5] . If an asset is deemed to
have been acquired, and an amount deemed to have been incurred,
prior to 1 July 2012 the interim expenditure rules will apply (see
Chapter 7).

Non-adjacent land and buildings used in
connection with administrative or accounting
activities.

5.68
Capital expenditure is excluded
expenditure to the extent that it relates to land or
buildings that are not adjacent to the project area for a mining
project interest and are used in connection with administrative or
accounting activities. [Section
35-60]

5.69
The reason for this approach is that land or buildings that are at
or adjacent to upstream mining operations are likely to take their
value from the production right itself and their treatment
recognises that investment in such assets is a risk associated with
the project. However, the value of non-adjacent land
and buildings does not reflect this risk and is likely to
appreciate over time. Therefore, capital payments in relation
to these assets are excluded expenditure.

5.70
However, to the extent that a building used for accounting and
administrative functions is also used for upstream mining
operations, the expenditure referable to the upstream mining
operations is deductible. This is consistent with the idea
that it does not matter where upstream mining operations occur, the
expenditure associated with those operations, is deductible.

Capital expenditure

5.71
While the distinction between revenue and capital expenditure is
generally not relevant for MRRT purposes, it is here. Put
simply, an expense is of a capital nature if it is directed at the
business entity, structure or organisation so that the business can
operate; an expense is of a revenue nature if it is directed at the
operation of the business (per Dixon J in Sun Newspapers Ltd and Associated Newspapers
Ltd v FC of T (1938) 61 CLR 337). The purchase of
land on which a head office is constructed is an example of a
capital expense, as too would be the construction of the head
office.

Adjacent

5.72
Adjacent to the project area should be taken to mean the nearest
practicable location that is consistent with this principle.
Whether a place is the nearest practicable location will vary in
different circumstances and may take into account factors such as
mine operation, safety, and remoteness.

Example
5.22 : Adjacent land and buildings

Wildfire Coal
operates an underground coal mine in relation to a production right
that it holds. Due to the remoteness of the coal mine,
employees engaged in operations on the mine site live in a regional
centre located 50 kilometres away. All administration for the
coal mine is carried on at the administration building in this
regional centre. The company incurs capital expenditure in
respect of that administration building. The expenditure is
not excluded expenditure as the building is ‘adjacent’
to the project area — the nearest practical location for land
or buildings where administrative or accounting activities can be
carried out for the operations of the coal mine.

Example
5.23 : Non-adjacent land and
buildings

South & Co
Mines operates an iron ore mine in the Pilbara region. It
incurs capital expenditure on a building in Perth from which it
conducts the administration associated with the mine. The
capital expenditure for the building is excluded expenditure
because the building is not adjacent to the Pilbara
mines.

Example
5.24 : Administrative building used for more
than one mine

Pick & Shovel
operates a coal mine in Queensland and an iron ore mine in Western
Australia. It has a building adjacent to its iron ore mine in
Western Australia, from which it carries out administrative
functions that support its iron ore mine, as well as its coal mine
in Queensland. To the extent that the capital expenditure
incurred on the building is referrable to its West Australian iron
ore mine, Pick & Shovel can claim a deduction. However,
the capital expenditure related to Queensland coal mining
operations is excluded expenditure because the building is not
adjacent to the coal mine.

Example
5.25 : Building used for administrative and
technical functions

Remote Controlled
Mining operates three iron ore mines in the Pilbara. It has a
building in Perth from which it performs administrative
functions. A number of operating, technical, and geological
services integral to upstream mining operations are also performed
from this building.

To the extent that
the capital costs of the building relate to upstream operating,
technical, and geological services, they can be included in mining
expenditure.

Hedging or foreign exchange
expenditure

5.73
Expenditure is excluded to the extent that it relates to hedging or
foreign exchange arrangements. [Section 35-65]

5.74
Hedging and foreign exchange arrangements are pure financial
transactions which, while they impact on the ultimate profitability
of a business, do not affect the value of the resource. While
it is doubtful that such expenditure would ever bear a sufficient
relationship to upstream mining operations in order to satisfy the
general expenditure test, this provision removes all
doubt.

Hedging arrangements

5.75
Excluded expenditure includes expenditure that relates to a
‘derivative financial arrangement’ (see subsection
995-1(1) of the ITAA 1997) [paragraph
35-65(a)] . Basically, this is a
financial arrangement that changes in value in response to a
variable, and in respect of which there is no requirement for a net
investment.

Foreign exchange
arrangements

5.76
Excluded expenditure also includes expenditure that relates to a
‘foreign currency hedge’ (see subsection 995-1(1) of
the ITAA 1997) [paragraph
35-65(b)] . Put simply, this is a
financial arrangement that hedges a risk in relation to movements
in currency exchange rates.

Example
5.26

KF Iron Exports
has entered a contract with a major overseas industrial group to
provide a substantial amount of iron ore over an extended period
for a set amount per tonne. As the currency of the country in
which the industrial group operates is volatile, KF Iron enters
into a hedging contract with a third party (unrelated to the sales
contract) to cover the possibility that the value of the currency
falls during the term of the contract. Any expenditure
relating to the foreign currency hedge is excluded expenditure for
MRRT purposes.

5.77
To the extent to which a hedging or foreign exchange arrangement
forms part of a sales contract, any expenditure on the hedge would
be included in mining expenditure. That is because the sales
contract, as a non-cash settlable arrangement, would not be a
‘derivative financial arrangement’ or a ‘foreign
currency hedge’.

Rehabilitation bonds and trust
payments

5.78
Amounts provided as security for rehabilitation of the project area
for a mining project interest are excluded expenditure for the
MRRT. [Subsection
35-70(1)]

5.79
To ensure that money put aside for rehabilitation is secure,
rehabilitation bonds and trust payments are generally placed in
low-risk investments. Therefore, it is not appropriate
that the MRRT uplift rate (which is intended to reflect the higher
risk associated with a resource project) apply to such
payments.

5.80
However, if an amount held as security is paid out by a trustee or
bondholder, then that amount will be included in the miner’s
mining expenditure to the extent that it is for rehabilitation of a
project area for the mining project interest the miner has at the
time the amount is incurred by the trustee or bondholder. If
more than one miner has a mining project interest in relation to
the project area, the miner may include in its expenditure the
amount that reasonably relates to its mining project. Such
amounts are considered expenditure of the miner at the time the
trustee or bondholder incurs the amount. [Subsection 35-70(2)]

5.81
The trustee must provide the miner with a notice containing the
information the miner needs to determine the extent to which the
amount is mining expenditure for the miner. [Schedule 1 to the MRRT (CA&TP) Bill, item 8,
section 121-12 of Schedule 1 to the Taxation Administration
Act 1953] .

Payments of income tax or
GST

5.82
Income tax payments under the ITAA 1997 or the ITAA 1936 are
excluded expenditure and cannot be deducted against mining
revenue. [P aragraph
35-75(a)]

5.83
Payments of GST, input tax credits and decreasing adjustments are
also excluded expenditure. As with mining revenue, all mining
expenditure is deducted on a GST-exclusive basis.
[Paragraphs 35-75(b)
and (c)]

5.84
All payments of penalties or interest under tax laws are excluded
expenditure. [Paragraph
35-75(d)]

Unit shortfall charge under
the Clean
Energy Bill 2011

5.85
The amendments make unit shortfall charges incurred by an entity in
relation to its obligations under the Clean Energy Bill 2011
excluded expenditure. [Schedule 3, item 92 of the MRRT (CA&TP)
Bill, section 35-80 of the MRRT
Bill)

5.86
A unit shortfall occurs when an entity has not surrendered enough
emission units to meet its emissions liability. Entities
liable for a shortfall charge will pay a premium above the value of
the unit.

5.87
The unit shortfall charge is excluded expenditure for MRRT purposes
to ensure that the entity liable to the charge bears its full cost
and does not have an incentive to defer its emissions
liability.

5.88
The amendment to the MRRT Bill commences at the later of the
commencement of the Clean Energy Bill 2011 and the commencement of
the MRRT Bill. This ensures that both pieces of legislation are
enacted before the amendment occurs. [Clause 2 to the MRRT (CA&TP) Bill, item 8 of
the table]

Outline of chapter

6.1
This chapter explains how to calculate the individual allowances
(apart from starting base allowances, which are explained in
Chapter 7) that reduce a mining profit for a Minerals Resource
Rent Tax (MRRT) year. It explains the allowances’
common features and why there are some differences between
them.

Summary of new law

6.3
An MRRT liability for a mining project interest is calculated by
reducing the interest’s mining profit by any MRRT allowances
and multiplying the result by the MRRT rate.

6.4
MRRT allowances are taken into account in a specified order.
The seven types of allowances available to miners, and the order in
which they are applied in working out the MRRT liability for a
mining project interest are:

â¢
royalty allowances;

â¢
transferred royalty allowances;

â¢
pre-mining loss allowances;

â¢
mining loss allowances;

â¢
starting base allowances;

â¢
transferred pre-mining loss allowances; and

â¢
transferred mining loss allowances.

6.5
Starting base allowances are explained in Chapter 7.

6.6
Only so much of the available royalty credits, pre-mining
losses and mining losses (including by way of transfer) as are
necessary to reduce the mining profit to nil can be an MRRT
allowance in a particular MRRT year.

6.7
Allowances reduce the mining profit of a mining project interest in
the specified order until either the mining profit is reduced to
nil or the available royalty credits, pre-mining losses,
mining losses and starting base losses are exhausted.

6.8
The balance of any royalty credits, mining losses and
pre-mining losses available after the mining profit is
reduced to nil are then available to be transferred to offset
mining profits of certain other mining project interests. Any
balance remaining after these transfers is carried forward to
future MRRT years and is uplifted.

Detailed explanation of new
law

Allowances generally

6.9
Under the MRRT, the mining profit of a mining project interest for
an MRRT year must be
reduced by any available MRRT allowance. [Sections 60-10, 65-10, 70-10,
75-10, 80-10, 95-10 and
100-10]

6.10
Allowances are applied in this order:

â¢
royalty allowances;

â¢
transferred royalty allowances;

â¢
pre-mining loss allowances;

â¢
mining loss allowances;

â¢
starting base allowances;

â¢
transferred pre-mining loss allowances; and

â¢
transferred mining loss allowances.

The allowance
highest in the order must be fully applied before the next highest
can be applied, and so on. [Section
10-10]

Allowances only up to the amount of the mining
profit

6.11
If royalty credits, pre-mining losses, mining losses or
starting base losses are available, the amount of each is applied
in calculating the relevant allowance up to the amount of the
mining profit remaining after applying any higher ranked
allowances. [Sections 60-10,
60-15, 65-10, 65-15, 70-10, 70-15,
75-10, 75-15, 80-10, 80-15, 95-10,
95-15, 100-10 and
100-15]

Example
6.1 : Ordering of allowances

Alpha
Coal Co has a mining profit for a mining project interest for an
MRRT year of $52 million and available royalty credits of $5
million, a pre-mining loss of $3 million and a mining loss of
$45 million.

The $5
million royalty credit is fully applied to calculate a royalty
allowance of $5 million, which reduces the remaining mining profit
to $47 million. The pre-mining loss is fully
applied to calculate a pre-mining loss allowance of $3
million, which reduces the remaining mining profit to $44
million. The available mining loss of $45 million is applied
to the extent necessary to reduce the remaining mining profit to
nil. That is, a mining loss allowance of $44 million, leaving
an available mining loss of $1 million.

6.12
Any remaining royalty credits, mining losses and pre-mining
losses still available after the mining profit is reduced to nil
can then be transferred to other mining project interests to the
extent possible to reduce their mining profits. Different
conditions need to be satisfied for royalty credits,
pre-mining losses and mining losses to be
transferrable. These are explained below.

Order of applying royalty credits, losses and
pre-mining losses

6.13
If there is more than one royalty credit, more than one mining
loss, or more than one pre-mining loss available, they are
applied in the order in which they arose. [Subsections
60-15(2), 65-15(2), 70-15(2), 75-15(2)
95-15(2) and 100-15(2)]

6.14
The miner may choose the order in which to transfer two or more
royalty credits, pre-mining losses or mining losses that
arose at the same time. [Subsections
65-15(2), 95-15(2) and
100-15(2)]

Uplifting

6.15
The conversion of royalty credits, pre-mining losses and
mining losses to allowances only occurs to the extent that the
particular allowance will be fully applied to reduce mining profit
for the year. The royalty credits, pre-mining losses
and mining losses still unapplied at the end of the year are
uplifted. The amounts of royalty credits and mining losses
are uplifted at the long term bond rate + 7 per cent (LTBR + 7 per
cent) each year [subsections
60-25(2) and 75-20(3)] . The
amount of a pre-mining loss is uplifted at the LTBR +
7 per cent for the first 10 years after the loss arises, but
only at the long term bond rate (LBTR) thereafter [section
70-50] .

When two interests relate to iron ore or do not
relate to iron ore

6.16
Before amounts can be transferred between two interests to give
rise to a transferred royalty allowance, a transferred
pre-mining loss allowance or a transferred mining loss
allowance, one of the preconditions is that the two interests must
either both relate to
iron ore or both not
relate to iron ore. This limits transfers to project
interests with the same broad groupings: those that are
related to iron ore and those that are related to coal.

6.17
An interest will relate to iron ore if it relates to
extracting:

â¢
iron ore [paragraph
20-5(1)(a)] ; or

â¢
something produced from a process that results in iron ore being
consumed or destroyed without extraction [paragraph 20-5(1)(c)] .

6.18
An interest will not relate to iron ore (that is, it will
effectively relate to coal) if it relates to extracting:

â¢
something produced from a process that results in coal being
consumed or destroyed without extraction [paragraph 20-5(1)(c)] .

Example
6.2 : Pre-mining project interests do
not relate to iron ore

Greater Coal Gas
Co has two pre-mining project interests. One
pre-mining project interest involves an extensive coal
deposit that Greater Coal is considering developing into a coal
mine. The other pre-mining project interest is awaiting
State approval to begin a coal seam gasification
operation.

The first
pre-mining project interest relates to coal. The second
pre-mining project interest relates to gas produced by
consuming the coal in
situ .

Since neither of
Greater Coal’s pre-mining project interest relates to
iron ore, allowances may be transferable between
them.

Example
6.3 : Mining project interests relate to
different resources

Green Bond Mines
has a mining project interest that extracts coal with an available
mining loss and another mining project interest that extracts iron
ore that has a mining profit for the year.

The first mining
project interest relates to coal. The second mining project
interest relates to iron ore. As the project interests relate
neither both to iron ore nor both to something other than iron ore,
the mining loss of one mining project interest cannot be
transferred to the mining project interest with the mining
profit.

Royalty allowances

6.19
A miner has a royalty
allowance for a mining project interest if the
interest has a mining profit and there are royalty credits that
relate to that interest [section
60-10] . The amount of the royalty
allowance is the sum of the available royalty credits up to the
amount of the mining profit [subsection
60-15(1)] . Excess royalty credits
are applied in calculating any transferred royalty allowance for
another mining project interest of the miner for the MRRT year if
that other interest is integrated with the first mining project
interest at all times from when the royalty credit arose to the end
of the transfer year. Any remaining royalty credits are
uplifted and are available for use in future years.

Royalty credits

6.20
For a liability to be relevant in determining if a royalty credit
arises for a mining project interest, it has to be incurred on or
after 1 July 2012. It does not matter whether the
resources were extracted on, before, or after that day.
[Subsection 60-20(2); and Schedule 4
to the Minerals Resource Rent Tax (Consequential Amendments and
Transitional Provisions) Bill 2011, item
6]

Royalties

6.21
A mining royalty gives rise to a royalty credit for a mining
project interest when the miner incurs a liability to pay the
royalty in relation to taxable resources extracted under a
production right that relates to the interest.
[Paragraph
60-20(1)(a)]

6.22
A mining
royalty is a liability payable under a Commonwealth,
State or Territory law to make a payment in relation to a taxable
resource, extracted under the authority of a production right,
that:

â¢
is a royalty; or

â¢
would have been a royalty if the taxable resource had been owned by
the Commonwealth, a State or Territory just before it was
recovered.

[Subsection
35-45(1)]

6.23
The first dot point alludes to the need for a mining royalty to be
a ‘royalty’ within the ordinary meaning of that
word. Within its ordinary meaning, a royalty is a payment
usually made in respect of a particular exercise of a right to take
a substance that is calculated in respect of either the quantity or
value taken or the occasions on which it is exercised (see
FCT v Sherritt Gordon Mines
Ltd 77 ATC 4365 at p. 4372; Stanton v FCT (1955) 92 CLR 630 at
p. 642). So, for instance, a royalty does not include
amounts imposed by some State mining legislation by way of interest
for late payment of mining royalties, even if those interest
payments are described as ‘royalties’ for the purposes
of that legislation.

6.24
The second dot point deals with possible arguments that a relevant
liability cannot be a royalty if it is not payable to the Crown and
that a payment cannot be a royalty if it is not paid to the owner
of the resources in
situ . It ensures that liabilities incurred under
Australian laws can still be a mining royalty even when payable to
private owners of taxable resources in the ground.

6.25
Mining royalties include royalties payable to the Commonwealth, as
well as the more common State and Territory royalties. This
is necessary because the MRRT law extends to Australia’s
offshore areas, which can be the subject of authorities to extract
resources under the Offshore
Minerals Act 1994 . Commonwealth royalties could
apply in respect of such resources (see section 4 of the
Offshore Minerals (Royalty) Act
1981 ).

Payments by way of recoupment of
royalties

6.26
A royalty credit also arises for a mining project interest when the
miner incurs a liability to pay an amount (in relation to a taxable
resource extracted under a production right that relates to the
interest) to another entity by way of recoupment of a liability of
the other entity that:

â¢
gives rise at any time to a royalty credit for that other entity in
relation to the production right; or

â¢
would give rise at any time to a royalty credit for that other
entity if the other entity had a mining project interest relating
to that production right.

[Paragraph
60-20(1)(b)]

6.27
This covers the situation where a miner with a mining project
interest but no direct interest in the production right has to
compensate the production right holder for the mining royalty it
must pay. It does not matter whether the production right
holder itself has a mining project interest in relation to that
production right.

Example
6.4 : Minerals rights
agreement

Alister Co owns a
mining lease on which it mines mineral sands. Under a
Minerals Rights Agreement, Alister grants Blaster Co an exclusive
right to enter the land covered by the mining lease to mine and
remove iron ore. Title in the iron ore is transferred at the
point of extraction. Under the agreement, Blaster Co is
contractually obliged to comply with the obligations associated
with the Mining Lease to the extent those obligations relate to the
exercise of its iron ore right. One of the obligations is
that Blaster Co pays the State all the royalties applicable to the
iron ore it mines that are legally payable by Alister Co as the
mining lease holder.

Blaster Co is the
miner under the MRRT law and Alister Co is not because it does not
share in the production from the operation. Blaster Co is
entitled to a royalty credit, even though Alister Co is legally
required to pay the royalties. The royalty credit is
available to Blaster Co because its payment to the State on behalf
of Alister Co recoups Alister Co’s liability that would have
given rise to a royalty credit if Alister Co had had a mining
project interest.

6.28
It also covers cases where a miner has to compensate someone else
who in turn has to compensate the production right holder.
This could arise when a miner conducts a mining operation by
agreement with the production right holder but sub-leases the
actual mining activities to another miner in return for a share of
the taxable resources produced. The possibility of a chain of
such obligations is covered. [Paragraph 60-20(1)(b)]

6.29
Whether the holder of the mining project interest obtains a royalty
credit for royalties paid by another party (for instance, the
production right holder) depends on whether the interest holder
pays an amount to the other party to recoup the actual royalty the
other party pays. ‘Recoupment’ is defined by
section 20-25 of the Income Tax Assessment Act 1997 (ITAA
1997) and includes any kind of recoupment, reimbursement, refund,
insurance, indemnity or recovery however described.
[Section 300-1, definition of
‘recoupment’]

Example
6.5 : Royalty reimbursement arrangement

Porthole
Properties Pty Ltd grants Fox Fine Ores an exclusive license to
access and mine coal on its production right. Fox acquires
title in the coal after it is loaded onto the run-of-mine stockpile
and must pay Porthole $5 a tonne for the coal it sells.
Porthole is required by State law to pay royalties for the coal Fox
mines but is, under its agreement with Fox, entitled to
reimbursement of those royalties.

Fox is the miner
under the MRRT, and Porthole is not because it does not share in
the production from the operation. Therefore, Porthole is not
entitled to any royalty credit for the royalties it pays. Fox
is reimbursing Porthole rather than paying a royalty directly but
is still entitled to a royalty credit for the payments because they
‘recoup’ Porthole’s royalty payments and Porthole
would have got a royalty credit for its payments if it had been a
miner.

6.30
A miner reduces its royalty credits in an MRRT year it receives, or
becomes entitled to receive, a recoupment of a liability that gave
rise to a royalty credit for one of its mining project
interests. Royalty credits are reduced in the order in which
they arose. Only any remaining royalty credits after this
reduction can produce royalty allowances and transferred royalty
allowances for that year. [Subsection
60-30(1)]

6.31
In the same way that royalty credits are the grossed-up
amount of the royalty liability (this is explained later),
recoupments of royalty liabilities are grossed-up before they
reduce a miner’s royalty credits. [Paragraph
60-30(1)(a)]

6.32
If the reduction for the recoupment exceeds the miner’s
royalty credits available to be reduced, the excess becomes mining
revenue of that year. [Subsection 60-30(2) and section
30-45]

6.33
The effect of generating royalty credits for
royalty payments relating to a production right and for payments to
recoup the payer of such royalties, and reducing credits for receiving
recoupments of such payments, is that the royalty credit from the
actual payment of the royalty is apportioned between the various
entities that have a mining project interest related to the
production right. That apportionment might not occur within a
single MRRT year. For example, if a royalty paid in one year
was recouped in the following year, there would be royalty credits
in the first year and a reduction in royalty credits in the second
year.

Example
6.6 : Royalty recoupment

Smelaya Resources
and Malyshka Minerals are jointly developing a mine owned by
Smelaya. They have agreed to share equally the resources they
mine and the costs they incur.

In 2014-15,
Smelaya is liable for royalties of $5 million to the State but,
under the terms of the agreement, is entitled to a $2.5 million
reimbursement from Malyshka. Smelaya generates a royalty
credit of $22.22 million ($5 million/0.225) and Malyshka generates
a credit of $11.11 million ($2.5 million/0.225) for its liability
to reimburse Smelaya. Smelaya will reduce its credit by
$11.11 million for that recoupment.

In 2015-16,
the State refunds Smelaya $2 million of its royalty payment as an
incentive to further develop the mine. This recoupment
reduces Smelaya’s royalty credits for 2015-16 by $8.89
million ($2 million/0.225). Because it is liable to pass
half of that on to Malyshka, it would also generate a royalty
credit of $4.44 million ($1 million/0.225). Receipt of
the refund reduces Malyshka’s 2015-16 royalty credits
by $4.44 million.

Initial amount of a royalty
credit

6.34
The amount of a royalty credit in the year it arises is the
grossed-up amount of the royalty liability incurred.
The grossing-up is achieved by dividing the royalty amount by
the MRRT rate. That produces a deductible amount that will
have the same effect as an offset equal to the royalty
payment. The royalty amount has to be converted into a
deductible amount, rather than applied as an offset, because the
ordering of allowances requires royalty allowances to be recognised
before some
deductible amounts (such as losses). [Subsection
60-25(1)]

Example
6.7 : Royalty payments and royalty
credits

South and Co Mines
extracts 500,000 tonnes of iron ore from its mining project.
The State charges a 7.5 per cent royalty on the value of the
iron ore at the point of sale. South and Co sells the
iron ore to a third party for $150 per tonne. It pays a
State royalty of $5.625 million.

South and Co
Mines’ royalty payment is converted to a royalty credit for
MRRT purposes by dividing it by the MRRT rate of 22.5 per cent
giving a royalty credit of $25 million. Its annual mining
profit for the mining project is $55 million. The royalty
credit is applied to produce a royalty allowance of $25
million. South and Co Mines’ mining profit is reduced
to $30 million by the royalty allowance, which exhausts the royalty
credit.

Example
6.8 : Royalty payment to private
landowner

Zenat Ltd extracts
20,000 tonnes of coal during an MRRT year from land owned by Yady
Co, which also owns the coal in the ground. Under State
legislation, a royalty of $6 per tonne extracted is payable
directly to Yady on a monthly basis. Zenat has an available
royalty credit of $533,333 [(20,000 Ã $6)/0.225] that will be
applied to calculate its royalty allowance. The payments to
Yady would normally be a private mining royalty but are instead
mining royalties because they are paid under State
legislation.

Uplifting unused royalty
credits

6.35
The amount of a royalty credit available in a later year is the
royalty credit available for the previous MRRT year less what was
applied during that previous year to work out a royalty allowance
or a transferred royalty allowance. That result is uplifted
by the LTBR + 7 per cent. [Subsection
60-25(2)]

Using up a royalty credit

6.36
A royalty credit ceases to be a royalty credit once it has been
fully applied in working out royalty allowances for the mining
project interest or transferred royalty allowances for other mining
project interests. [Subsection
60-20(3)]

Transferred royalty
allowances

6.37
A miner has a transferred royalty
allowance for a mining project interest for an MRRT
year if the interest has a remaining mining profit (after
application of royalty allowances) and there are unused royalty
credits available that can be transferred to it from other
interests. [Section
65-10]

6.38
A royalty credit of one mining project interest can be transferred
and used to offset a mining profit in another mining project
interest, if:

â¢
the two mining project interests are integrated at all times from
when the royalty credit arose to the end of the year in which the
royalty credit is transferred; and

â¢
the royalty credit does not relate to a year for which an election
was made to use the alternative valuation method .

[Subsection
65-20(1)]

6.39
Transferability of royalty credits aims to put mining project
interests that are unable to combine (because they have quarantined
allowances) into a similar position (prospectively) as if they had
combined.

6.40
Whether two mining project interests are integrated is explained in
Chapter 9.

6.41
The amount of a royalty credit that can be transferred to a mining
project interest cannot exceed the amount of the receiving
interest’s remaining mining profit. [Subsection 65-15(1)]

6.42
Royalty credits must be transferred in the order in which they
arose. If several royalty credits arose at the same time (for
example, if there are several mining project interests with credits
available to transfer), the miner can choose which of them to
transfer. [Subsection 65-15(2)]

Pre-mining loss
allowances

6.43
An entity has a pre-mining loss
allowance for a mining project interest for an MRRT
year if it has an available pre-mining loss that relates to
that interest and it has a remaining mining profit after deducting
all higher ranked allowances. [Section
70-10]

6.44
The amount of the pre-mining loss allowance is the lesser of
the sum of the available pre-mining losses and the remaining
mining profit. [Subsection
70-15(1)]

6.45
Any pre-mining losses remaining after a pre-mining loss
allowance is calculated are then applied in calculating any
transferred pre-mining loss allowance for the MRRT
year. Any pre-mining losses remaining after that are
then available for use in future years to reduce future mining
profits for that mining project interest. They are uplifted
at the LTBR + 7 per cent for the first 10 years, and
at the LTBR thereafter. [Section 70-50]

6.46
A pre-mining loss is an available pre-mining loss for a
mining project interest if it relates to a pre-mining project
interest from which the mining project interest originated. A
mining project interest ‘originates’ from a
pre-mining project interest when the mining project interest
starts to apply to an area and at the same time the
pre-mining project interest stops applying to that
area. [Section
70-20]

6.47
A pre-mining loss ceases to be a pre-mining loss once it has been
fully applied in working out pre-mining loss allowances for the
mining project interest or transferred pre-mining loss allowances
for other mining project interests. [Subsection
70-30(2)]

Pre-mining project
interest

6.48
A pre-mining project
interest is an interest in an authority or right for
a purpose (other than an incidental purpose) of exploration or
prospecting for taxable resources. If the interest relates to
both iron ore and another taxable resource it is treated as two
separate pre-mining project interests: one relating to the
iron ore and the other relating to the other taxable
resource(s). [Section
70-25]

6.49
Since ‘exploration or prospecting’ is defined to
include studies to evaluate the economic feasibility of mining
discovered resources, pre-mining interests will include
interests in mineral development leases, which are usually held for
those purposes. An interest in a retention lease is also
considered a pre-mining project interest, since one of the
significant rights conferred under a retention lease is to
explore. [Sections 70-25
and 300-1, definition of ‘exploration or
prospecting’]

Pre-mining
losses

6.50
An entity has a pre-mining
loss for an MRRT year if it holds a pre-mining
project interest and its pre-mining expenditure for the
interest exceeds its pre-mining revenue for the interest for
the MRRT year. [Subsection 70-30(1)]

6.51
This allows pre-mining project expenditure (for example,
exploration expenditure) that is a necessary precursor to the
development of a mining project interest to be recognised under the
MRRT.

Pre-mining
expenditure

6.52
An entity’s pre-mining
expenditure for a pre-mining project is
expenditure, whether of a capital or revenue nature, to the extent
it is necessarily incurred in carrying on the pre-mining
project operations, and is not excluded expenditure.
[Subsections
70-35(1) to (4)]

6.53
Operations or activities are pre-mining project
operations to the extent that they would have been
upstream mining operations if the interest were a mining project
interest rather than a pre-mining project interest
[subsection
70-35(5)] . Upstream mining
operations of a mining project interest are discussed in Chapter
5.

6.54
In some circumstances, an entity that holds a pre-mining project
can also include amounts in its pre-mining expenditure for the
exploration activities carried on by another entity under a
‘farm-out’ arrangement. A farm-out
typically involves an agreement between:

â¢
an entity that holds a pre-mining project interest (the farmor)
wanting to explore that project area; and

â¢
another entity (the farmee) who incurs expenses exploring the
project area, in exchange for an interest in the pre-mining project
interest.

6.55
Where the farm-out arrangement results in the farmee being
granted an interest in the pre-mining project, then the farmor will
include an amount in its pre-mining expenditure at that time to
reflect the value of the interest they have given up in exchange
for the exploration. [5] [Divisions 35 and
195]

Example
6.9 : Successful farm-out arrangement

Farmor Co holds an
exploration permit. It is interested in exploring the
pre-mining project area. Farmee Co agrees to undertake
the exploration work in exchange for a 10 per cent interest in the
exploration permit. Farmee Co agrees to complete the
exploration within three years and does so.

Farmor Co may
include in its pre-mining expenditure an amount for the exploration
services completed by Farmee. The non-cash benefit rules (in
Division 195) operate such that the amount of the deduction will be
the market value of the exploration services. The amount
ascertained using the non-cash benefit rules is included in Farmor
Co’s pre-mining expenditure when it is necessarily
incurred.

However, Farmee
Co’s exploration expenses are excluded expenditure because
they are its cost of acquiring a right (being its interest in the
permit).

6.56
However, in some circumstances the farm-out arrangement will not be
completed and the farmor will not be required to give the farmee an
interest in the pre-mining project interest. In those
circumstances, the farmor will have obtained the benefit of the
exploration without any expenditure. Specific provision is
therefore made to ensure that the costs of the exploration are
included in the pre-mining expenditure for the farmor’s
interest. They are included in pre-mining expenditure when it
becomes clear that the farmee is not going to be granted the
interest. [Subsection 70-35(7)]

Example
6.10 : Unsuccessful farm-out arrangement

Farmor Co holds an
exploration permit. It is interested in exploring the
pre-mining project area. Farmee Co agrees to undertake
the exploration work in exchange for a 10 per cent interest in the
exploration permit. Farmee Co agrees to complete the
exploration within three years but fails to do
so.

At the end of the
three years, the amounts incurred by Farmee Co in exploring in the
project area are included by Farmor Co in the pre-mining
expenditure for the pre-mining project
interest.

No double counting of pre-mining
expenditure

6.57
The same amount cannot be included in the pre-mining expenditure of
an entity under two or more provisions. This prevents the
double counting that could arise if an amount was otherwise
allowable under more than one provision. [Subsection
70-35(8)]

6.58
Similarly, where the same amount is included in both mining
expenditure and pre-mining expenditure it is only to be allowable
under the provision that is most appropriate. To determine
which the most appropriate provision is, it will be necessary to
have regard to the facts and circumstances of the particular case,
including the character of the amount and its relationship to the
mining project interest and pre-mining project interest.
[Subsection
70-35(9)]

Pre-mining revenue

6.59
An amount is pre-mining
revenue if it would have been mining revenue if the
pre-mining interest to which the amount relates had instead
been a mining project interest. For instance, the sale of
taxable resources that have been extracted under a mineral
development lease will give rise to an amount of pre-mining
revenue. In some instances, the amounts of pre-mining revenue
will exceed the amounts of pre-mining expenditure for a pre-mining
interest for an MRRT year to produce a pre-mining profit.
Pre-mining profits are discussed in Chapter 12.
[Section
70-40]

Mining loss allowances

6.60
A mining project interest has a mining loss
allowance for an MRRT year if the interest has a
mining profit remaining after all higher ranked allowances (royalty
allowance, transferred royalty allowance and pre-mining loss
allowance) have been applied and there is an available mining loss
for the interest. [Section
75-10]

6.61
The amount of a mining loss allowance is the lesser of the
remaining mining profit and the available mining losses for the
mining project interest. When working out the amount of a
mining loss allowance, mining losses are applied in the order in
which they arise. So, a mining loss that arises in the
2012-13 MRRT year will be applied before a mining loss that
arises in the 2013-14 MRRT year. [Section
75-15]

6.62
A mining project interest has a mining loss for an MRRT year if its
mining expenditure exceeds its mining revenue for the year.
The amount of the mining loss for that year is the amount of the
excess. [Subsections
75-20(1) and (2)]

6.63
The amount of a mining loss available in a later year is the mining
loss available for the previous year less the amount of it that was
applied during that preceding year in working out a mining loss
allowance or transferred mining loss allowances. The result
is uplifted by the LTBR + 7 per cent. [Subsection
75-20(3)]

Example
6.11 : Mining losses

Slow Start Pty
Ltd’s mining project interest makes a mining loss for each of
the 2013, 2014, 2015, 2016 and 2017 MRRT years. It then makes
a mining profit in the 2018 and 2019 MRRT years.

Assume:

â¢
LTBR for all years is 6 per cent, so the uplift factor is
1.13 (0.06 + 1.07).

â¢
There are no other relevant allowances or transferred
allowances.

Tax
year

2013
$m

2014
$m

2015
$m

2016
$m

2017
$m

2018
$m

2019
$m

Mining
profit/loss

(100)

(50)

(200)

(100)

(20)

400

800

Previous amount of
loss

2013

-

(100)

(113)

(127.69)

(144.29)

(163.05)

-

2014

-

-

(50)

(56.50)

(63.85)

(72.14)

-

2015

-

-

-

(200)

(226)

(255.38)

(154.35)

2016

-

-

-

-

(100)

(113)

(127.69)

2017

-

-

-

-

-

(20)

(22.60)

2018

-

-

-

-

-

-

-

Uplifted prior year
loss

2013

-

(113)

(127.69)

(144.29)

(163.05)

(184.24)

-

2014

-

-

(56.50)

(63.85)

(72.14)

(81.52)

-

2015

-

-

-

(226)

(255.38)

(288.58)

(174.41)

2016

-

-

-

-

(113)

(127.69)

(144.29)

2017

-

-

-

-

-

(22.60)

(25.54)

2018

-

-

-

-

-

-

-

Remaining mining
profit

0

0

0

0

0

0

455.76

The 2018 MRRT
year’s mining profit of $400 million is reduced by a mining
loss allowance worked out taking into account so much of each
available mining loss as does not exceed the mining profit,
starting with the oldest. The mining loss for the 2013 MRRT
year, as uplifted to the 2018 MRRT year ($184.24 million), is
applied first.

This is followed
by the mining loss for the 2014 year, as uplifted to the 2018 year
($81.52 million). Then the mining loss for the
2015 year, as uplifted to the 2018 year ($288.58 million), is
applied but only to the extent that it reduces the mining profit in
the 2018 year to nil. Therefore, only $134.24m of that loss
is used up
($400m â’ $184.24m â’ $81.52m)

This remaining
$154.34 million of the mining loss for the 2015 year will be
uplifted for the 2019 year (to $174.40 million) to be an available
mining loss to be applied in calculating the mining loss allowance
to be deducted from the $800 million mining profit for the 2019
year.

6.64
The mining loss from a particular MRRT year ceases to be a mining
loss if it has been fully applied in working out either one or more
mining loss allowances or one or more transferred mining loss
allowances. [Subsection
75-20(4)]

Transferred pre-mining loss
allowances

6.65
Because most mineral exploration in Australia is conducted by
entities that do not themselves mine their successful discoveries,
the transfer of pre-mining losses is dealt with differently
from the transfer of mining losses. Pre-mining losses
do not have to satisfy a common ownership test before they can be
transferred. However, they do have to satisfy the
requirements that transfers occur between interests related to the
same type of taxable resource and held by the same entity or by a
closely associated entity. The transfer of pre-mining
losses is also capped where they are acquired for an amount that is
less than their tax value.

When does a miner have a transferred pre-mining
loss allowance?

6.66
A miner has a transferred pre-mining
loss allowance for a mining project interest if it
has any remaining mining profit after deducting all higher ranked
allowances and there are available pre-mining losses.
[Section
95-10]

6.67
There are two situations in which a mining project interest can
have a transferred pre-mining loss allowance.

6.68
The first is where the miner (or a close associate) has a mining
project interest and holds a pre-mining project interest in
relation to the same type of taxable resource. The
pre-mining losses associated with the pre-mining
project interest can be applied to work out a transferred
pre-mining loss allowance for the mining project
interest. [Subsections 95-20(1)
and (2)]

6.69
The second is where a miner has a mining project interest that
originated from a pre-mining project interest that had a
pre-mining project loss. ‘Origination’ was
discussed in more detail above. In these circumstances, the
originating mining project interest inherits the pre-mining
loss, which can be applied to work out a transferred
pre-mining loss allowance another mining project interest of
the miner, or a close associate. [Subsections 95-20(1) and
(3)]

Meaning of closely
associated

6.70
An entity is closely
associated with another entity at a particular time
if they are both members of the same consolidatable group for
income tax purposes, or would be if the entities were Australian
residents. Broadly speaking, the concept of a
‘consolidatable group’ in the income tax law is
relevant to deciding whether a group of wholly-owned entities could
be treated as a single entity for income tax purposes.
However, the income tax concept does not permit foreign residents
to be the head or members of a consolidatable group. However,
reflecting the MRRT policy of requiring the transfer of
pre-mining losses between all members of a group, the
Australian residence requirement of the definition of
‘consolidatable group’ is ignored for these
purposes. [Subsection 95-20(5) and
section 300-1, definition of ‘consolidatable
group’]

Amount of a transferred pre-mining loss
allowance

6.71
The amount of a transferred pre-mining loss allowance is the
amount of the available pre-mining losses (or the amount of
the mining project interest’s remaining mining profit if that
is less). [Subsection 95-15(1)]

6.72
In calculating the amount of the allowance, pre-mining losses
are applied in the order in which they arose. If there are
several pre-mining losses that arose in the same year
(because they arose from different pre-mining project
interests), the miner can choose which of them to transfer
first. [Subsection
95-15(2)]

Capping the amount of a transferred
pre-mining loss allowance

6.73
On the sale of a pre-mining project interest or a mining
project interest, any pre-mining losses that exist in
relation to that interest will be transferred with it. These
transfers are explained in Chapter 10.

6.74
The purchaser can then apply the pre-mining losses to reduce
mining profits of its (or its close associates) mining project
interests.

6.75
However, to prevent trading in pre-mining losses that have a
greater economic value than the underlying project interest (the
loss interest), the extent to which those pre-mining losses
can be transferred to another mining project interest (the
receiving interest) may be capped when an interest is
acquired. [Sections 95-25 and
95-30]

6.76
The cap applies if either the receiving interest or the loss
interest was not held by the miner or a close associate at all
times from the start of the loss year until the end of the year in
which the loss is being transferred. This common ownership
test is not focused on whether there has been a change in the
direct ownership of the interests, nor is it asking if the
interests have remained in the one entity or group. Rather,
the test focuses on the relationship between the holders of the two
project interests and asks whether, at each moment within the test
period, both were held by the same entity or by entities within the
same common group (even if the entities holding them, or the group
they were part of, changed from time to time within the period).
[Paragraph 95-25(2)(b) and
subsection 95-25(3)]

6.77
The cap only applies to pre-mining losses that arose before the cap
arises and which are to be transferred in that year or a later
year. In other words, the cap does not limit the transfer of
pre-mining losses that arise for a year after the cap arises.
[Paragraphs 95-25(2)(c) and
(d)]

6.78
The cap arises in relation to a loss interest or a receiving
interest when an entity starts to have the interest. However,
as an exception to this, the cap does not arise when the interest
starts to exist (such as on the initial grant of a production or an
exploration right). The cap also does not apply if the entity
starts to have the interest simply because it is the head company
of a group that consolidates, or is the entity leaving a
consolidated group. [Paragraph
95-30(1)(a)]

6.79
The cap also arises when the entity that has the receiving interest
or the loss interest joins a consolidatable group (or would if the
Australian residence requirements of that definition were
ignored). This means that the cap will arise when an entity
that holds the loss interest becomes closely associated with a
miner that has the receiving interest. [Paragraph 95-30(1)(b)]

6.80
The amount of the cap is worked out by grossing-up the amount
paid for the receiving interest or the loss interest. Where
the entity that has the interest joins a consolidatable group, the
cap is worked out by grossing up so much of the amount paid for
that entity as is attributable to the interest. [Subsection
95-30(2)]

Example
6.12 : Cap on transferable pre-mining
losses

Log Jam Co.
buys:

â¢
a mining project interest for $1 million; and

â¢
a pre-mining project interest for $2 million, which has
$10 million of pre-mining losses from an earlier
year.

Assume that the
mining project interest has sufficient mining profit to utilise any
of the pre-mining losses available. At the end of the
MRRT year, Log Jam is required to transfer its pre-mining
losses to the mining project interest, subject to the following
caps:

â¢
for the mining project interest — the cap is $4.44 million
($1m/0.225); and

â¢
for the pre-mining project interest — the cap is $8.88
million ($1m/0.225).

Log Jam must
transfer only $4.44 million of its pre-mining losses to the
mining project interest.

Transferred mining loss
allowances

6.81
A miner has a transferred mining loss
allowance for a mining project interest for an MRRT
year if the interest has a mining profit (after the application of
all other allowances) and there is a mining loss that is available
to be transferred. [Section
100-10]

6.83
Mining losses that can be transferred must be applied in the order
in which they arose. However, if several losses arose at the
same time (for example, if there are several mining project
interests with losses available for transfer), the miner can decide
the order in which they are applied. [Subsection
100-15(2)]

6.84
A mining loss of a mining project interest must be transferred to
another mining project interest if:

â¢
the mining loss is not attributable to an MRRT year in respect of
which an election was made to use the alternative valuation method
for its mining project interest [paragraph 100-20(1)(b)] ;
and

â¢
the two mining project interests both relate to iron ore or both
relate to taxable resources that are not iron ore (that is, a coal
mining project interest cannot transfer its mining loss to reduce a
mining profit from an iron ore mining project interest and vice
versa) [paragraph
100-20(1)(c)] .

Example
6.13 : Order of application of mining
losses

Hidden Treasure
Mines Ltd has mining project interest A, which it has owned since
before the MRRT and which has mining losses for each of the 2013 to
2016 MRRT years. In the 2014 MRRT year, it acquires mining
project interest B. Mining project interest B has a remaining
mining profit (after higher ranking allowances are applied) in the
2016 MRRT year. Due to the common ownership test, mining
project interest A’s mining losses of 2013 and 2014 cannot be
applied to mining project interest B. They will be carried
forward (and uplifted) to be used against mining project interest
A’s own future mining profits.

In the 2016 MRRT
year, the mining losses of project interest A for the 2015 and 2016
MRRT years must be applied against mining project interest
B’s 2016 mining profit (after all other allowances have been
applied). The loss for 2015 must be applied first and that
for 2016 applied if there is any profit
remaining.

Common ownership
test

6.85
The common ownership test is satisfied if, at all times from the
start of the year for which the mining loss arose to the end of the
year in which the mining loss is to be applied, the two mining
project interests were held by the same miner or by miners who are
closely associated with each other. [Section
100-25]

6.86
The common ownership test is not focused on whether there has been
a change in the direct ownership of the mining project interests,
nor is it asking if the interests have remained in the one entity
or group. Rather, the test focuses on the relationship
between the holders of the two mining project interests and asks
whether, at each moment within the test period, both were held by
the same entity or by entities within the same common group (even
if the entities holding them, or the group they were part of,
changed from time to time within the period).

6.87
This test is similar to the common ownership test that can limit
the transfer of some pre-mining losses (discussed above). However,
while a pre-mining loss that fails the common ownership test may
only be limited in the extent to which it is transferred, a mining
loss that fails to meet the common ownership test cannot be
transferred at all.

Example
6.14 : Same miner has both interests

Echo Coal
Co is the head of a consolidated group (which consolidated for MRRT
purposes in 2012). Mining project interest P1 has a mining
loss for the 2013 year and mining project interest P2 has a mining
profit for that year. Because it is a consolidated MRRT
group, both interests are treated as being held by the
group’s head entity, Echo Coal Co, from the start of the
loss year until the end of the transfer year. P1’s
mining loss is available to reduce P2’s mining profit for the
year. Similarly, P1’s mining loss is available to be
applied in calculating a transferred mining loss that will reduce
mining profits of P3, P4 or P5.

Example
6.15 : Transfer of the group containing loss
and profit project interests

Following on from
the previous example, Foxtrot Coal Co purchases Bravo Coal Co
(which owns P1 and P2). Bravo Coal Co is now part of
Foxtrot’s consolidatable group. P1 and P2 have moved
from Echo’s consolidated group to Foxtrot’s
consolidatable group. While P1 and P2 have existed in two
different groups during the test period, the two interests have
always been in the same group as each other. There has been
no interruption to their relationship; they have continually been
closely associated with each other. P1 is required to
transfer any available mining loss to P2 as it has a mining profit,
up to the amount of that profit. However, P1’s mining
loss cannot be transferred from P1 to P6 or P7 since P1 was not in
common ownership with P6 and P7 at all times from the start of the
year in which the mining loss arose to the end of the year in which
the mining loss is to be applied.

Following on from
the previous example, Foxtrot Co undertakes a restructure and moves
ownership of P2 from Bravo Coal Co to Hotel Coal Co. As
Foxtrot’s group is not consolidated, each subsidiary within
the group is a miner and responsible for its own MRRT
liability.

While P1 and P2
are now held by different miners, each miner is within the same
consolidatable group. Therefore both mining project interests
have at all times been held by miners closely associated with each
other. P1’s available mining loss would still be
required to be transferred to P2 up to the amount of P2’s
remaining mining profit but those mining losses could still not be
transferred to P6 or P7 for the same reason as in the previous
example.

Example
6.17 : Loss and profit project interests
sold simultaneously

Following
on from the previous example, India Coal Co, a single entity miner,
simultaneously purchases P1 and P2 from Bravo Coal Co and Hotel
Coal Co. P1 and P2 are now held by the same miner (a single
entity). As P1 and P2 were purchased by India Coal Co at the
same time, both mining project interests continue to have always
been closely associated with each other. Therefore, any
available mining loss in P1 still needs to be transferred to P2 up
to the amount of P2’s remaining mining
profit.

7.2
All legislative references throughout this chapter are to the MRRT
Bill unless otherwise indicated.

Summary of new law

7.3
Starting base allowances recognise investments in assets (starting
base assets) relating to the upstream activities of a mining
project interest that existed before the announcement of the
resource tax reforms on 2 May 2010. They also
recognise certain expenditure on such assets made by a miner
between 2 May 2010 and 1 July 2012.

7.4
A mining project interest has a starting base allowance if it has
profit remaining after using all other higher ranked allowances,
and it has one or more starting base losses. Unlike other
losses, starting base losses are never transferable to other mining
project interests.

7.5
A starting base loss reflects the annual depreciation (decline in
value) of the starting base assets. If there is insufficient
profit to use a starting base loss, it is carried forward and
uplifted.

7.6
A miner can choose to work out the starting base losses for its
mining project interest based on either:

â¢
the market value of starting base assets (including rights to the
resources) at 1 May 2010; or

â¢
the most recent accounting book value of starting base assets (not
including rights to the resources) available at that
time.

7.7
Under the market value approach, a starting base asset is
depreciated over the shorter of: the asset’s remaining
effective life; the life of the mine; and the period until
30 June 2037. The undepreciated value of a starting
base asset is not uplifted, though the real value of any unused
losses is preserved by uplifting them by the consumer price index
(CPI).

7.8
Under the book value approach, a starting base asset is depreciated
over five years. The undepreciated value of a starting base
asset is uplifted each year by the long term bond rate plus 7 per
cent (LTBR + 7 per cent). Any unused losses are also
uplifted by the LTBR + 7 per cent.

Detailed explanation of new
law

A miner has an allowance when it can use a
starting base loss

7.9
A mining project interest has a starting base allowance if it has
sufficient profit to use some or all of its starting base losses,
after using all other higher ranked allowances [sections 80-10 and
80-15] . Royalty,
transferred royalty, pre-mining loss, and mining loss
allowances are all higher ranked allowances [section 10-10] .

7.10
A mining project interest has a starting base loss for a year when
the miner holds a starting base asset and there is a decline in
value of that asset. The loss is reduced to the extent it is
applied as a starting base allowance, and ceases to exist when it
has been fully applied. [Section 80-20]

Starting base assets produce starting base
losses

What is a starting base
asset?

7.11
Starting base assets include most tangible and intangible assets
that are relevant to the upstream operations of a mining project
interest. [Section
80-25]

7.12
A starting
base asset is one that is used, installed ready for
use, or being constructed for use in carrying on the upstream
mining operations in relation to a mining project interest at the
‘start time’ [subsections 80-25(1)
and (2)] . The concept of
‘upstream mining project operations’ is explained in
Chapter 5. The ‘start time’ is explained
below.

7.13
The definition of a starting base asset is based on the income tax
definition of a ‘CGT asset’ (see section 108-5 of
the Income Tax Assessment Act
1997 (ITAA 1997)), which means any kind of property or a
legal or equitable right.

7.14
The ‘asset’ concept is a broad one, encompassing all
types of legal property and rights. Where a miner holds an
interest in an asset, the interest in the underlying asset is
itself capable of being a starting base asset. [Section 250-15]

7.15
Land that is used in upstream mining operations can be a starting
base asset. Improvements to land or fixtures on land are
treated as separate assets, not as part of the land, regardless of
whether they can be removed from the land or are permanently
attached. This ensures that a miner can hold these things as
starting base assets, regardless of whether it holds the land on
which the improvement or fixture exists. [Subsection 80-25(5)]

Some starting base assets are combined under the
market value approach

7.16
Notwithstanding that improvements to land are treated as separate
to the land, under the market value approach, any improvement to
land (but not a fixture) in the project area of a mining project
interest is taken to be part of the same starting base asset as the
rights and interests constituting the mining project
interest. This inclusion reflects the practical difficulty in
ascribing a separate market value to improvements to land, which of
their nature cannot be dealt with separately from the underlying
mining rights. [Paragraph 80-30(1)(d)]

7.17
In further recognition of these valuation difficulties, under
the market value approach, an improvement to land that existed
on 1 May 2010 is recognised in the starting base even if
it is consumed or destroyed before the start time [paragraph
80-25(4)(b)] . In contrast, other
starting base assets must be used, installed ready for use, or
being constructed for use in the upstream mining operations at the
start time [subsection
80-25(1)] .

7.18
For an interest using the market value approach, mining information
(as defined in subsection 40-730(8) of the ITAA 1997) is
treated as an item of property or a legal or equitable right.
This is necessary since information is not otherwise considered a
legal asset as it is not capable of assignment (for example, see
Hepples v FCT (1990)
90 ATC 4497 and Taxation Determination TD 2000/33).
[Paragraph 80-25(4)(a) and
section 300-1, definition of ‘mining, quarrying
and prospecting
information’]

7.19
Like improvements to land, any mining information relating to a
mining project interest is taken to be part of the same starting
base asset as the rights and interests that comprise the mining
project interest. Again, this reflects the interdependent
nature of these assets and the difficulties that would arise if
they were to be valued separately. For the same reason, any
goodwill that would otherwise be considered a separate starting
base asset is instead taken to be part of this single starting base
asset. [Subsection
80-30(1)]

7.20
This composite starting base asset is taken to be a depreciating
asset (unless none of the constituent assets are depreciating
assets), which has an effective life equal to the longest effective
life of any of those rights and interests. As a consequence,
it will be written off over the shorter of that life and the period
until the end of 30 June 2037. [Subsections 90-15(1), (2) and
(3)]

Some starting base assets are excluded under the
book value approach

7.21
For a mining project interest using the book value approach, the
rights and interests that make up the mining project interest
itself are not included in the definition of a starting base
asset. This reflects the policy to exclude the value of the
taxable resources if a miner chooses the book value approach.
For the same reason, the value of mining information is also
excluded. It is unlikely that goodwill would be an asset that
can be meaningfully identified in relation to the upstream
operations of a mining project interest (as goodwill is normally
associated with a business enterprise as a whole). However,
to the extent that it would otherwise be considered a starting base
asset, goodwill is also excluded under the book value
approach. [Paragraph
80-25(3)(a)]

Mine development expenditure as a starting base
asset

7.22
Some expenditure that is incurred between 2 May 2010 and
1 July 2012 is included in the starting base even though
it does not relate to another starting base asset. This
expenditure, called mine development expenditure, is itself taken
to be a starting base asset. It is expenditure incurred in
carrying on upstream mining operations that relates to developing a
mine. It includes the costs of removing overburden,
excavating a pit and sinking a mineshaft, which are generally
treated as a revenue expense and so would not otherwise be included
in the starting base. Mine development expenditure is
discussed further under ‘interim expenditure’
below. [Section
80-35]

There are no starting base assets unless a
starting base return is lodged

7.23
An asset is not considered to be a starting base asset where a
miner fails to make a valid choice about whether to use the market
value or the book value approach or fails to lodge a starting base
return. The starting base choice is described below and the
starting base return is discussed in Chapter 18. [Paragraph
80-25(3)(b)]

Assets used, installed ready for use, or being
constructed for use

7.24
The concept of an asset being ‘used, or installed ready for
use’ also appears in the depreciation provisions of the
income tax law (see section 40-60 of the ITAA
1997).

7.25
The word ‘used’ takes its ordinary meaning, which in
any particular case will depend on the context in which the word is
employed and the purpose for which the asset is held
( Newcastle City Council v Royal
Newcastle Hospital (1956) 96 CLR 493).

7.26
The degree of physical or active use that is required to constitute
‘use’ will depend to a certain extent on the nature of
the asset and the purpose for which it is held. For a
tangible depreciating asset, physical or active employment of the
asset would generally be expected in order for an asset to be
considered to be being ‘used’. For an intangible
asset, employment of the asset may not be physical and the asset
may be considered to be being ‘used’ in the context of
passive use. However, use would generally be expected to
involve an exploitation of the inherent character of the
asset.

7.27
The phrase ‘installed ready for use’ is defined in
subsection 995-1(1) of the ITAA 1997 and requires not
only that the asset be installed ready for use but also that it be
‘held in reserve’. In that context, a thing is
‘held in reserve’ if it is held for future use in an
existing operation and the concept of holding in reserve is not
‘so wide as to embrace income producing operations which may
be undertaken at some future time’ ( Case X46 90 ATC 378
(at 381)). [Section 300-1, definition of
‘installed ready for
use’]

7.28
In the context of the MRRT starting base, the phrase ‘being
constructed for use’ is intended to cover assets that are in
the process of being created by the miner for later use in the
upstream operations of the mining project interest. A similar
concept exists in section 41-25 of the ITAA 1997 in respect of the
investment allowance, and there is case law on the former
investment allowance provisions which provides guidance on the
concept. See, for example, FC of T v. Tully Co-operative Sugar Milling
Association Limited 83 ATC 4495; Monier Colourtile Pty Ltd v. FCT
(1984) 84 ATC 4846, and Utah
Development Co. v. FCT (1983) 83 ATC 4545.

Start time for starting base
assets

7.29
A starting base asset is one that is used, installed ready for use,
or being constructed for use in carrying on the upstream mining
operations in relation to the mining project interest at the later
of:

â¢
1 July 2012; and

â¢
the time production (other than incidental production) commences
for the mining project interest.

[Subsection 80-25(2)]

7.30
This time is referred to as the ‘start time’ of the
starting base asset. It defines the time from which the
asset’s decline in value is worked out to produce starting
base losses. Before this time, the assets will not be
recognised as starting base assets and so will not be capable of
producing starting base allowances. In this way, the start
time defines the way in which recognition of the starting base is
deferred until there is production of taxable resources from a
mining project interest.

7.31
Many mining project interests that exist on 1 July 2012 will
already be producing taxable resources and so, for them, the start
time will be that date.

Production other than incidental
production

7.32
However, some mining project interests will be in a development
phase on 1 July 2012 and will not be producing until a later
time. For these interests, the start time is deferred until
that production gets underway.

7.33
The start time does not occur when there has merely been incidental
production of taxable resources from the project area of a mining
project interest. That is, it is not sufficient that a mining
revenue event has occurred in relation to a taxable resource
extracted from a project area.

7.34
Whether the extraction of taxable resources amounts to
‘production’ or merely ‘incidental
production’ is a question of fact that should be determined
having regard to the purpose for which, and the manner and volume
in which, those resources are being extracted. For instance,
the extraction of taxable resources that occurs before the
development of a mine may constitute ‘incidental
production’. However, ‘production’ is not
intended to be necessarily limited to the way in which, and the
extent to which, taxable resources are planned to be extracted when
the mine is fully developed and operational.

Example
7.1 : Not incidental production

Blue Tongue Co.
has a mining project interest, which relates to an underground coal
mine it is developing on land covered by its production
right.

On 1 July 2012,
Blue Tongue Co. is extracting coal as part of its work to build the
shaft and underground development workings of the mine. It is
able to sell these resources for $50 million. It is liable to
pay MRRT in relation to the sale of these
resources.

The amount of coal
being extracted, and the value at which it is sold is significant
enough to represent non-incidental production, notwithstanding that
part of the purpose for which the coal is extracted is to further
develop the mine.

Blue Tongue Co.
will be able to recognise and write off its starting base assets
from 1 July 2012 even though it has not yet started to produce
taxable resources in the volumes it intends when the mine is fully
operational.

Example
7.2 : Incidental production

Tiger Co. holds a
production right on which it is considering developing an open cut
mine. In assessing the viability of that potential
development, Tiger Co. decides to mine enough coal to make a trial
shipment to a potential customer in Japan, to test the quality of
the coal in a Japanese blast furnace. Tiger Co. mines 20,000
tonnes of coal from the mine and sells it as one cargo for $4
million. It is liable to pay MRRT in relation to the sale of
these resources.

This production is
considered to be incidental production, as it was a single cargo,
prior to a commitment to build the coal mine on the area covered by
the production right. While it was able to sell these taxable
resources, Tiger Co. is not producing resources in sufficient
quantities to meet regular orders from customers. As this
extraction is merely incidental to a wider purpose of testing the
feasibility of a mine it is not production that meets the test for
determining the start time of starting base
assets.

Start time of a combined mining project interest
under the market value approach

7.35
In some cases, a miner can choose to combine mining project
interests that are integrated in their downstream mining
operations. This is discussed in detail in
Chapter 9. The interests that are combined are referred
to as ‘constituent interests’. Under the market
value approach, the start time of an asset that is, or includes,
one of these constituent interests is deferred until the time that
production commences in relation to that constituent
interest. [Paragraph 80-25(2)(b)
and subsection 80-30(2)]

7.36
In other words, for a single starting base asset that relates to a
constituent interest that, apart from a downstream integration
choice, would be a separate mining project interest, the start time
is the time production (other than incidental production) commences
in the project area of the constituent interest.

7.37
However, where a miner has a mining project interest that includes
constituent interests that are combined because they are
upstream integrated,
and the market value approach is chosen, the start time for the
asset that is, or includes, one of these constituent interests is
when production commences from any of those constituent
interests. So, if a mine covers multiple production rights
that meet the upstream integration test, the start time for the
single starting base asset comprising those rights is when the
production occurs from any of those rights.
[Paragraph 80-25(2)(b)]

Nelson Minerals
Co. has two separate iron ore mines, Grimley and Stolarek.
Grimley mine is made up of two production rights. The
production rights making up Grimley mine satisfy the upstream
integration test. The two mines are also sufficiently
integrated to meet the downstream integration test. Nelson
Minerals Co. has chosen to combine the mines into a single mining
project interest.

At 1 July 2012,
Grimley mine is producing taxable resources from an area covered by
one of its production rights, but not the other. The start
time for the starting base asset that includes the two production
rights that relate to Grimley mine is 1 July
2012.

At that time, no
taxable resources are extracted from the area covered by the
production right that relates to Stolarek mine. The start
time for the starting base asset that includes that production
right occurs when taxable resources start to be produced from that
production right.

When does a miner hold a starting base
asset?

7.38
The MRRT meaning of ‘hold’ broadly adopts the income
tax definition for depreciation purposes (see section 40-40
of the ITAA 1997), which generally refers to the economic owner of
the asset. However, in order to ensure that the entity that
will bear an MRRT liability also has the benefit of a starting
base, the entity that has a mining project interest is taken to
hold the starting base asset that is the rights and interests
constituting the mining project interest. [Sections 250-5 and
250-10]

Amount of a starting base
loss

7.39
The starting base loss is based on a portion of the value (the
decline in value) of the starting base assets. The principles
and mechanisms used in the depreciation provisions of the income
tax law (Division 40 of the ITAA 1997) have, to the extent
possible, been adopted to work out the decline in value of a
starting base asset.

Amount of a starting base loss in the year in
which it arises

7.40
For the year in which the starting base loss arises, it is worked
out as follows:

â¢
Step 1: Work out the decline in value of each starting base
asset the miner held in the year.

â¢
Step 2: Reduce that result to the extent that the asset is
used, installed ready for use, or being constructed for use, for a
purpose other than upstream mining operations of the mining project
interest.

â¢
Step 3: Reduce the result further to the extent the asset
relates to a use that would not be deductible under the MRRT.

â¢
Step 4: Add up the resulting amounts for each of the starting
base assets.

Step 1 — Decline in value of each starting
base asset

7.41
The starting base loss includes an amount equal to the
‘decline in value’ for a year of a starting base asset
that a miner held for any time during the year. This is
explained further below. [Subsection
80-40(1)]

Step 2 — Ignore the decline in value to
the extent it does not relate to upstream mining
operations

7.42
The starting base loss does not include any part of the
asset’s decline in value that is attributable to the miner
using the asset, having it installed ready for use, or constructing
it for use, for a purpose other than upstream mining operations in
relation to the mining project interest. [Subsections 80-40(2) and
(3)]

7.43
Any decline in value that is not attributable to upstream mining
operations will not contribute to a loss. However, this does
not affect the decline in value itself, which will continue
irrespective of the use of the asset. This means that any
decline that is attributable to a period when the asset was not
used for upstream mining operations is not available to form part
of a starting base loss in a later year.

Example
7.4 : Ignore decline in value for downstream
use

Fran Co. has one
starting base asset with a base value for the MRRT year of $10
million. The decline in value of the asset for the year is
$1 million.

Fran Co. uses the
asset 20 per cent in the upstream mining operations of its mining
project interest. Therefore, the starting base loss is
$200,000 (which is the full decline, reduced by $800,000 to reflect
the use of the asset other than in upstream mining
operations).

Fran Co. has
chosen the market value approach for the mining project interest,
so the base value of the asset for the next MRRT year is
$9 million.

7.44
The narrow base of the MRRT means there is a need to apportion the
decline in value. This will be relevant when starting base
assets are partly used to mine taxable resources and partly used to
mine non-taxable resources, or even when assets used solely
to mine taxable resources are partly used for downstream mining
operations (that is, activities after the valuation point).
As under the general mining expenditure provision (discussed in
Chapter 5), this apportionment should be made on a fair and
reasonable basis.

Step 3 — Ignore the decline in value to
the extent it relates to amounts that would be explicitly not
deductible

7.45
The starting base loss does not include any part of the
asset’s decline in value that would be excluded expenditure
if it were an amount that was incurred on or after
1 July 2012 [subsections 80-40(2) and
(4)] . So, to the extent that the
circumstances which lead to an amount being specifically
non-deductible apply in relation to a starting base asset in
a year, the decline in value of that asset is so reduced. For
an explanation of ‘excluded expenditure’, see Chapter
5.

Cham Co. has a
starting base asset which is a building located away from the
project area. In the 2013-14 year, the building is used
partly for accounting activities. If Cham Co. had incurred a
capital amount during the year in relation to the building it would
be excluded expenditure to that extent. As a consequence, to
that extent the decline in value of the starting base asset (the
building) for the year is not taken into account in working out the
starting base loss.

7.46
Expenditure incurred to acquire an interest in a production right
is one type of excluded expenditure [section
35-35] . However, if the
market value approach is chosen, the decline in value of a starting
base asset that is a production right (or an interest in a
production right) is not reduced simply because it relates to the
production right [subsection
80-40(5)] .

Example
7.6 : Decline that relates to a starting
base asset that is a production right

Fox Co. chooses to
use the market value approach. It has a starting base asset
which is an interest in a production right. If Fox Co.
incurred an amount during the year to acquire this interest, it
would be excluded expenditure. However, the decline in value
for the year for the starting base asset (the interest) is not
affected in these circumstances.

Step 4 — Add up the remaining amounts for
each starting base asset

7.47
The starting base loss is the total of the amounts worked out under
steps 1 to 3 for each starting base asset [subsections 80-40(1) and
(2)] . In other words, a miner
adds together the decline in value of each of the starting base
assets of a particular mining project interest to work out the
interest’s starting base loss for the year (less any
reductions under steps 2 and 3). As explained above,
this starting base loss produces an allowance to the extent that
the interest has sufficient mining profits to offset these
losses.

Amount of a starting base loss after the year in
which it arises

7.48
In a later year, the starting base loss includes any unused
starting base loss for the mining project interest for the previous
year, increased by an uplift factor. [Section
80-45]

7.49
An unused starting base loss is any part of a starting base loss
that did not become a starting base allowance in the previous
year. In other words, it is the amount (if any) by which the
starting base loss for the previous year exceeded the mining profit
for the previous year, after all higher ranked allowances had been
applied.

7.50
To the extent that a starting base loss is not used in a year, it
is uplifted and carried forward to the next year. The uplift
factor that applies is:

â¢
under the book value
option — LTBR + 7 per cent [paragraph (a) of the definition of
‘uplift factor’ in
subsection 80-45(1)] ;
and

â¢
under the market
value option — the CPI for the previous year
ending 31 March. The CPI is expressed in the same way as in
subsection 960-275(1) of the ITAA 1997 [paragraph (b) of the definition of
‘uplift factor’ in
subsection 80-45(1)] .

Example
7.7 : Starting base loss for a year after
the loss arose

Link Co. has a
starting base loss of $1 million for the 2015-16 MRRT
year. It has no mining profits remaining after it applies its
higher ranked allowances, so it carries forward the entire loss to
the next year.

Link Co. has
chosen the book value approach for the mining project interest, so
it uplifts the loss by the LTBR + 7 per cent. Assume the long
term bond rate (LTBR) for the 2015-16 MRRT year is 6 per
cent.

Therefore, in the
2016-17 MRRT year, the amount of the 2015-16 starting
base loss is $1.13 million ($1m Ã (0.06 +
1.07)).

7.51
A starting base loss can arise in relation to a pre-mining
project interest from which a mining project interest originates.
Also, a mining project interest can originate from two or
more pre-mining project interests. Where this occurs and a
miner has chosen to use the book value approach in relation to one
or more of the pre-mining interests and the market value approach
in relation to one or more of the other pre-mining interests,
then there are two starting base losses that arise in an MRRT year
for the mining project interest. One is a starting base loss
in relation to any pre-mining interest that uses the book value
approach, and the other is a starting base loss in relation to any
pre-mining interest that uses the market value approach. Of
the two starting base losses that arise in the same year, the
starting base losses that relate to book value approach will be
applied first, then the starting base losses that relate to market
value approach. This is also what happens when two mining
project interests that use different valuation methods combine,
which is discussed in more detail in Chapter 9. [Section 80-50]

Choosing between the market value and book value
approaches

7.52
A miner can choose to value and write off all the starting base
assets in relation to a mining project interest using either the
market value or the book value approach. [Paragraph 85-5(1)(a),
subsection 85-5(2) and
section 85-15]

7.53
The choice can also be made in relation to a pre-mining
project interest. Although a starting base will not
apply in relation to a pre-mining interest, the choice can be
exercised in relation to that interest so that a mining project
interest originating from the pre-mining project interest can apply
that choice. [Paragraph 85-5(1)(b)]

Choice applies to all assets used in a
project

7.54
The choice as to which approach to adopt needs to be made by a
miner in relation to all the starting base assets in a particular
mining project interest. As the choice may need to be made
before the start time, it applies to those assets that are not yet,
but may become, starting base assets of the mining project interest
or of a mining project interest that will originate from the
pre-mining project interest. [Subsection
85-5(1)]

7.55
Where a miner has more than one mining project interest, it can
adopt different approaches in relation to the different
interests. As starting base losses are not transferable
between different mining project interests, there is no requirement
that the different mining projects of a miner (or a closely
associated miner) have adopted the same approach.

Making the choice

7.56
The starting base choice is made by lodging a starting base return
in the approved form that specifies the choice to use the market
value or book value approach and provides information about the
base value of starting base assets. The starting base return
is discussed in greater detail in Chapter 18.
[Section 85-5 and Schedule 1 to the Minerals
Resource Rent Tax (Consequential Amendments and Transitional
Provisions) Bill 2011 (MRRT (CA&TP) Bill), item 8, section
117-20 of Schedule 1 to the Taxation Administration Act 1953
(TAA 1953)]

7.57
Generally, an entity is able to make its starting base choice and
lodge its starting base return up to the earlier of the day its
MRRT return for the first MRRT year is due (or would have been due
if it was required to lodge a return for that year), or within a
further time allowed by the Commissioner of Taxation
(Commissioner). However, where the project interest is
transferred after 1 July 2012 and before a choice is made, the
transferee must make the choice and lodge the starting base return
by the same time the transferor would have been required to if it
had continued to have the interest.

7.58
The choice is irrevocable [Schedule 1 to the MRRT (CA&TP) Bill,
item 8, section 119-10 of Schedule 1 to the TAA
1953] . It applies to the
starting base assets of the mining project interest for the first
MRRT year and all later years [subsections 85-5(1) and
(5)] .

7.59
However, the irrevocable choice could be problematic if there is
uncertainty as to what constitutes a mining project interest at the
time the choice needs to be made. In these circumstances,
there would be compliance and administrative difficulties if an
entity was required to specify the particular mining project
interests to which a choice applies. For example, at that
time there may be doubt as to whether mining project interests were
integrated and so able to combine (see Chapter 9 for an explanation
of integration and combination). In order to ameliorate these
potential difficulties, an entity can choose to use a valuation
approach in relation to the mining project interest(s) or
pre-mining project interests that relate to a particular area,
rather than nominating the project interests directly.
[Subsection 85-5(4)]

Example
7.8 : Choice covering an area

Bay Co. has two
mining operations, Alpha and Beta, which it initially considers to
be two mining project interests. The start time for each is
1 July 2012.

Bay Co. elects to
use the book value approach in relation to any mining project
interest(s) it has at 1 July 2012 that relate to the area
covered by Alpha.

Bay Co. elects to
use the market value approach in relation to any mining project
interest(s) it has at 1 July 2012 that relate to the area
covered by Beta.

After making the
choice, Bay Co. identifies that it actually held three mining
project interests on 1 July 2012, as it had been mistaken
about the ability to combine two mining project interests (Gamma
and Delta) into the one mining project interest
Beta.

Bay Co.’s
choice to use the market value approach validly applies to Gamma
and Delta as these mining project interests relate to an area
covered by the choice, notwithstanding the irrevocable nature of
the choice which it originally thought applied to
Beta.

Example
7.9 : Choice covering more than one mining
project interest

Port Co. has two
mining operations, Epsilon and Zeta, which it initially considers
to be separate mining project interests. The start time for
each is 1 July 2012.

Port Co. elects to
use the book value approach in relation to Epsilon, and to use the
market value approach in relation to the other mining project
interests it has at 1 July 2012. At a later time,
Port Co. identifies that it actually held one mining project
interest on 1 July 2012, as it had been mistaken about
the ability to separately identify Epsilon and Zeta, which should
have been identified as a single mining project interest,
Omega.

Port Co.’s
choice to use the market value approach in relation to the other
mining project interests it has at 1 July 2012 validly
applies to Omega, notwithstanding the irrevocable nature of the
choices which it originally thought applied to
Omega.

Restrictions on when a miner can choose the book
value approach

7.60
Any miner can choose the market value approach to work out the
value of its starting base assets. However, a miner can only
choose the book value approach if an audited financial report was
prepared in relation to the mining project interest during the 18
months before 2 May 2010. [Paragraph
85-10(1)(a)]

7.61
This financial report must also relate to a financial period that
ended in the 18
months prior to 2 May 2010. This precludes the use
of a financial report that relates to a financial period that ended
before that time, even if the report was prepared in the 18 months prior to
2 May 2010. [Paragraph
85-10(1)(b)]

7.62
The miner (or the consolidated entity of which it is a part) must
have prepared the financial report in accordance with the
accounting standards. The financial report must also have
been audited in accordance with the auditing standards.
[Paragraphs 85-10(1)(a) and (c) and
subsection 85-10(2)]

7.63
A ‘financial report’ means an annual financial report
or a half-year financial report prepared under Chapter 2M of
the Corporations Act 2001 .
Either of these is acceptable, though the initial book value would
be the value of the asset recorded in the most recent audited
financial report available before 2 May 2010.
[Paragraph 90-25(3)(a)]

7.64
‘Accounting standard’ and ‘auditing
standard’ are both defined as having the same meaning as in
the Corporations Act 2001 [section 300-1, definitions of
‘accounting standard’ and ‘auditing
standard’] .
‘Consolidated entity’ is also defined in the
Corporations Act 2001 to
mean a ‘company, registered managed investment scheme or
disclosing entity together with all the entities it is required by
the accounting standards to include in consolidated financial
statements’.

What happens if a miner does not make a valid
choice?

7.65
As mentioned above, if an entity fails to make a valid choice about
whether to use the market value or the book value approach and
lodge a starting base return, it will not have any starting base
assets [paragraph
80-25(3)(b)] . However, the
Commissioner may allow further time for an entity to do this
[Schedule 1 to the MRRT (CA&TP) Bill, item 8,
subsection 117-20(3) of Schedule 1 to the
TAA 1953] .

How to work out the decline in value of starting
base assets

7.66
As discussed above, the starting base loss will be based on the
decline in value of the starting base assets. The decline in
value of a starting base asset is worked out using the following
formula:

[Section
90-5]

7.67
The ‘base value’ of an asset represents the value of
the asset that can be further declined. It is a
year-start amount on which the decline in value for the year
can be worked out. The base value of a starting base asset
will depend on whether the miner has elected to use the book value
approach or the market value approach. This is explained
further below.

7.68
‘Starting base days’ are the days in the year (other
than those that occur before the start time or after a starting
base adjustment event) in which the miner held the starting base
asset and either used it, had it installed ready for use, or was
constructing it, for any purpose [subsection 80-40(6)] .
This part of the formula apportions the decline in value where an
asset is held for less than the full MRRT year (such as where it is
disposed of during the year). Consistent with other parts of
the tax law, this apportionment is done over 365 days, regardless
of whether the year is a leap year. As explained above, where
a miner uses its starting base asset for purposes other than
upstream mining operations, this will not affect the decline in
value but it will affect the amount of the starting base loss.

7.69
The ‘write off rate’ of a starting base asset will
depend on whether the miner has elected to use the book value
approach or the market value approach.

Write off rate under the book value
approach

7.70
The following table lists the annual write off rates under the book
value approach. [Section
90-10]

Table
7.1 : Annual write off rates under the book
value approach

For this MRRT
year:

The write off rate
is:

the MRRT year in
which the start time for the asset occurs

36%

the first MRRT
year commencing after the start time for the asset
occurs

37.5%

the second MRRT
year commencing after the start time for the asset
occurs

37.5%

the third MRRT
year commencing after the start time for the asset
occurs

60%

the fourth MRRT
year commencing after the start time for the asset
occurs

100%

7.71
These rates are based on those announced on
2 May 2010. However, the rates have been adjusted
to reflect the declining balance approach used in the formula
above.

7.72
The 2 May 2010 announcement stated that depreciation was
to occur over five years with the following profile: 36 per cent;
24 per cent; 15 per cent; 15 per cent; and 10 per cent.
However, this profile assumed a fixed balance being depreciated in
each year. Under the declining balance approach, the
equivalent write off rates are: 36 per cent; 37.5 per cent; 37.5
per cent; 60 per cent; and 100 per cent.

7.73
The results under each approach are identical. However, the
declining balance approach has been chosen as a more efficient
legislative expression, given the need to make adjustments to
increase the base value of an asset for any interim expenditure and
the LTBR + 7 per cent uplift.

Write off rate under the market value
approach

7.74
Under the market value approach, the write off rate of a starting
base asset for an MRRT year is worked out by reference to its
remaining effective life, according to the following equation:

[Subsection
90-15(1)]

7.75
The ‘remaining effective life’ of an asset that is a
depreciating asset (under Division 40 of the ITAA 1997) is any
period of its effective life that is yet to elapse as at the start
of the MRRT year. [Subparagraph (a)(i) of the definition of
‘remaining effective life’ in
subsection 90-15(1)]

7.76
For this purpose, the effective life of a starting base asset is
the period worked out under Division 40, as at the asset’s
start time. This may require a miner to reassess the
effective life of its assets at the start time, rather than relying
on its original estimates for income tax purposes. This may
be significant when the original estimates have not taken into
account changes in the way the assets are used.

7.77
The term ‘effective life’ describes the length of time
over which any entity could reasonably expect to use the particular
asset. The estimated effective life of an asset is expressed
in years. Part years are expressed as a fraction, and are not
rounded to the nearest whole year (see sections 40-100 and
40-105 of the ITAA 1997).

7.78
Under Division 40 of the ITAA 1997, a taxpayer usually has the
option to use an effective life determined by the Commissioner or
to work out the effective life of the asset itself according to how
long the asset can be used to produce income (see section
40-95 of that Act). An exception is the effective life
of a mining, quarrying or prospecting right, which is the period
over which the taxpayer reasonably expects the reserves can be
extracted from the mine.

7.79
The remaining effective life of the combined starting base asset
(explained above) is taken to be the longest remaining effective
life of any of the constituent assets are that are depreciating
assets. If none of the constituent assets are depreciating
assets, then the combined asset will not be taken to be a
depreciating asset. [Subsection
90-15(3)]

Example
7.10 : Effective life of the starting base
asset that includes the mining project interest and mining
information

Tool Co. has a
single starting base asset that consists of its interest in
production right Kappa, and another interest in production right
Sigma. The remaining effective life of the single starting
base asset is worked out according to the longest effective life of
these rights, as worked out under Division 40 of the ITAA 1997 at
the start time.

On 1 July 2012
(the start time), Tool Co. works out the effective life of Kappa to
be 15 years, and Sigma to be 10 years (according to Tool’s
estimates on 1 July 2012 about the reserves of the different mines
to which each right relates).

The remaining
effective life of the starting base asset is based on the period of
the effective life of Kappa that is yet to elapse. Therefore,
at the end of 30 June 2013, the remaining effective life of the
starting base asset is 14 years.

7.80
The remaining effective life of a starting base asset may be capped
to the shorter of the following:

â¢
the longest remaining effective life of any right or interest that
makes up the mining project interest; and

â¢
the period until 1 July 2037 (which is 25 years after the MRRT
commences).

[Subsection
90-15(2) and subparagraphs (a)(ii) and (iii) of the
definition of ‘remaining effective life’ in
subsection 90-15(1)]

7.81
In other words, an asset with a remaining effective life that
exceeds any of these caps is taken to have a remaining effective
life equal to the shorter of the caps.

7.82
Starting base assets that are not depreciating assets (and so do
not have an effective life for income tax purposes, such as land
and many intangibles) will also be taken to have a remaining
effective life equal to the shortest of those caps.
[Subsection 90-15(2) and paragraph (b) of
the definition of ‘remaining effective life’ in
subsection 90-15(1)]

Base value under the book value
approach

Base value for the year in which the start time
occurs

7.83
Under the book value approach, for the MRRT year in which the start
time occurs, the base value of a starting base asset that was held
in relation to the mining project interest (or the pre-mining
project interest from which the mining project interest originates)
at all times in the interim period is:

â¢
the initial book value of the asset [subparagraph
90-25(1)(a)(i)] ; plus

7.84
If the starting base asset was not held at all times in the interim
period (because it was acquired during that period), then its
initial base value is simply the sum of the valuation amounts
(uplifted interim expenditure) [paragraph
90-25(1)(b)] .
‘Interim period’ is explained below.

Initial book value

7.85
The initial book value of a starting base asset is:

â¢
the amount recorded in the accounts that produced the most recent
audited financial report available before 2 May 2010,
uplifted from the date of that report until the end of the year in
which the start time occurs; or

â¢
if the auditor’s report recorded another value in relation to
the asset — that value, uplifted from the date of the
auditor’s report until the end of the year in which the start
time occurs .

The uplift factor
is the LTBR + 7 per cent. [Subsections 90-25(3) and
(5)]

Valuation amounts for interim
expenditure

7.86
Valuation amounts for interim expenditure include the interim
expenditure (explained below) in relation to starting base assets,
uplifted by the LTBR + 7 per cent for the
period between when the amount is incurred and the end of the year
in which the start time for the asset occurs. [Subsections 90-25(6) and
(7)]

Base value for later
years

7.87
For every later MRRT year, the base value of the asset is reduced
by the decline in value, and the result is then uplifted by the
LTBR for the previous year + 7 per cent.
[Section
90-30]

Base value under the market value
approach

7.88
Under the market value approach, the base value of a starting base
asset reflects its market value as at 1 May 2010, plus
any interim expenditure in relation to the asset.
[Subsection 90-40(1) and section
90-35]

Base value for the year in which the start time
occurs

7.89
For the MRRT year in which the start time occurs, the base value of
a starting base asset that was held in relation to the mining
project interest (or the pre-mining project interest from which the
mining project interest originates) at all times from
2 May 2010 to 30 June 2012 is:

â¢
the market value of the asset on 1 May 2010 [subparagraph 90-40(1)(a)(i)] ;
plus

â¢
any interim expenditure [subparagraph
90-40(1)(a)(ii)] .

7.90
If the starting base asset was not held at all times in the interim
period (because it was acquired during that period), then its
initial base value is simply the sum of the interim
expenditure. [Paragraph
90-40(1)(b)]

Market value of the asset

7.91
‘Market value’ is not defined in the legislation,
though its ordinary meaning is modified for the effect of GST and
the costs of converting non-cash benefits. [Section 300-1, definition of ‘market
value’]

7.92
The common law definition of market value (discussed in
Spencer v Commonwealth of
Australia (1907) 5 CLR 418) is based on the principles
of:

â¢
a willing but not anxious vendor and purchaser;

â¢
a hypothetical market;

â¢
the parties being fully informed of the advantages and
disadvantages associated with the asset being valued; and

â¢
both parties being aware of current market conditions.

7.93
The market value of a starting base asset will be the amount worked
out using these principles. In addition, the general MRRT
valuation principles discussed in Chapter 14 are particularly
relevant to the determination of the market value of a starting
base asset.

7.94
Where a mining project interest originates from a pre-mining
project interest that existed on 1 May 2010, the market value of
the mining project interest is taken to be the market value of that
pre-mining project interest as at 1 May 2010.
[Section
90-45]

7.95
The market value of a starting base asset that is (or includes) a
mining project interest should be worked out ignoring any liability
to pay a private mining royalty [subsection
90-40(3)] . This ensures that
these liabilities, which would be excluded expenditure, do not
reduce the value of the starting base. However, this does not
include private mining royalties paid on or after 1 July 2012 under
a pre 2-May 2010 arrangement, as these are not excluded
expenditure (explained in Chapter 5).

Market value of starting base assets that relate
to a pre-mining project interest that existed on 2 May
2010

7.96
In some circumstances, an entity that has chosen to write off its
starting base assets using the market value approach will not be
required to actually market value those assets.

7.97
Where the market value approach is chosen for a pre-mining
project interest that existed on 2 May 2010, an entity can make a
further choice to work out the base value of its starting base
assets using a ‘look back’ approach. The
look-back approach is intended to ease compliance costs for
entities that would otherwise find it difficult or costly to
undertake a proper market valuation of assets. [Subsection
180-5(1)]

7.98
This choice (like the choice to use the market value approach) is
irrevocable and needs be made as part of the starting base return
(discussed above and in Chapter 18). [Section 180-5 and Schedule 1 to the MRRT
(CA&TP) Bill, item 8, sections 117-20 and 119-10 of
Schedule 1 to the
TAA 1953]

7.99
The look-back choice can only be made in relation to a
pre-mining project interest that existed on 2 May 2010.
However, the choice itself will be made soon after the end of the
first MRRT year. By this time, a mining project interest may
have originated from the pre-mining project interest.
In this case, the choice applies to the starting base assets that
relate to that mining project interest. [Subsection
180-5(1)]

7.100
The effects of the choice to use the look-back approach are
that:

â¢
all the starting base assets are treated as a single asset; and

â¢
the initial base value of that single starting base asset is taken
to be the sum of pre-mining expenditure incurred in the
10 years before 2 May 2010. Chapter 6 explains the types
of expenses that are included in pre-mining expenditure.

[Section
180-10]

Interim expenditure

7.101
The initial base value of a starting base asset will also include
any interim expenditure incurred in relation to it. In
contrast to the book value approach, interim expenditure under the
market value approach is not uplifted for the period between when
it is incurred and the end of the year in which the start time for
the asset occurs. [Section 90-40]

Base value for later
years

7.102
For every later MRRT year, the base value of a starting base asset
is its base value for the previous year less the decline in value
for the previous year. In contrast to the book value
approach, this amount is not uplifted for the year under the market
value approach. [Section 90-50]

Interim expenditure

7.103
Under either the book value approach or the market value approach,
the base value of a starting base asset can include ‘interim
expenditure’. Interim expenditures are certain amounts
incurred on starting base assets in the interim period —
being the period ending on 30 June 2012 and starting
on:

â¢
under the book value approach — the date of the accounts that
are reflected in the audited financial report; and

â¢
under the market value approach — 2 May 2010.

[Subsections
90-55(1), (4) and (5)]

7.104 Interim
expenditure includes amounts incurred on assets held
throughout this period, as well as expenditure on assets that start
to be held in this period. [Subsection
90-55(1)]

7.105 Interim
expenditure includes the following kinds of amounts
incurred in this period in relation to a starting base asset:

â¢
if the starting base asset is a ‘depreciating asset’
for income tax purposes — amounts included in the
‘cost’ of that asset for income tax purposes
[subparagraph
90-55(1)(a)(i)] ; and

â¢
if the starting base asset is a ‘CGT asset’ (but not a
depreciating asset) for income tax purposes — amounts
included in the ‘cost base’ of that asset for income
tax purposes, except for ‘third element’ costs (which
are the costs of owning the asset, such as interest costs —
see subsection 110-25(4) of the ITAA 1997) [subparagraph 90-55(1)(a)(ii) and
subsection 90-55(2)] .

7.106 Interim
expenditure also includes mine development
expenditure that relates to the mining project interest.
[Subsection
90-55(6)]

Mine development
expenditure

7.107 Mine
development expenditures are the amounts a miner
incurs between 2 May 2010 and 1 July 2012 in
developing the project area of its mining project interest as part
of carrying on its upstream operations. In particular, it
includes expenditure incurred in:

â¢
removing overburden from the project area;

â¢
excavating a pit in the area; and

â¢
sinking a mineshaft in the area.

[Section
80-35]

7.108
To the extent it is not interim expenditure on another starting
base asset, mine development expenditure itself is taken to be a
starting base asset [paragraph
80-35(1)(c)] . The deemed
asset is taken to be held for as long as the miner has the mining
project interest, and is taken to be used in the upstream mining
operations [subsections 80-35(2) and
250-10(2)] . The deemed
asset is not a depreciating asset and so, if the market value
approach is chosen, will be written off accordingly [paragraph (b) of the definition of
‘remaining effective life’ in subsection 90-15(1) and
subsection 90-15(2)] .

7.109
Mine development expenditure cannot itself be interim expenditure
relating to another amount of mine development expenditure
[subsection
90-55(7)] . That is, any amount
of mine development expenditure that does not relate to another
starting base asset (other than one deemed to be an asset because
it was another amount of mine development expenditure) is taken to
be a separate starting base asset.

Example
7.11 : Mine development expenditure is taken
to be a starting base asset

Mystic Mining Co.
incurs mine development expenditure on 1 June 2011.
The expenditure does not relate to any of its other starting base
assets for the mining project interest. Therefore, the
expenditure is taken to be a new starting base asset that Mystic
Mining Co. holds and uses in the upstream mining operations of
the mining project interest.

Mystic Mining Co.
incurs another amount of mine development expenditure on
1 July 2011. The expenditure does not relate to any
of its other starting base assets for the mining project
interest. The expenditure cannot be considered interim
expenditure relating to the new starting base asset (that is, the
earlier mine development expenditure). Instead, the
expenditure is taken to be another starting base asset that Mystic
Mining Co. holds and uses in the upstream mining operations of the
mining project interest.

Other reductions to base
value

Recoupment of base value

7.110
In most cases where a miner receives an amount for a starting base
asset a starting base adjustment will apply (see Chapter 13).
However, if a miner receives an amount for a starting base asset
that is not part of a starting base adjustment event, then the base
value of the asset is reduced to the extent there is an economic
recoupment of the asset’s base value [section
90-65] . This is equivalent
to the recoupment of mining expenditure (which is explained in
Chapter 4).

Example
7.12 : Recoupment of the base value of a
starting base asset

Continuing the
previous example, on 30 June 2011 Mystic Mining Co.
receives a government grant that subsidises the activities on which
Mystic Mining Co. had incurred the mine development expenditure to
the extent of 50 per cent. The base values of the
starting base assets that were taken to have arisen when the
expenditure was incurred are reduced by half of the subsidy (which
is the proportion of the grant that has the effect of offsetting
the base value for each asset).

Partial disposals of starting base
assets

7.111
The base value of a starting base asset is also reduced to the
extent that the miner disposes of any interest in the asset before
its start time. This ensures that the impaired value of an
asset is reflected in a lower base value for the asset.
[Section 90-60]

7.112
Where a miner stops holding a part of a starting base asset after
the start time, there is a starting base adjustment, which is
discussed in Chapter 13.

Starting base and schemes to avoid
MRRT

7.113
The general anti-avoidance rule (discussed in Chapter 17) applies
to schemes that increase the base value of a starting base
asset. This means that the increase in the base value of a
starting base asset will be treated as an ‘MRRT
benefit’ for the purposes of applying the general
anti-avoidance rule. [Schedule 4 to the MRRT (CA&TP) Bill, item
12]

7.114
The fact that the starting base is recognised over a number of MRRT
years (whereas capital expenditure is otherwise recognised
immediately under the MRRT) and that starting base losses are not
transferable (whereas mining losses are transferable to close
associates) means that there will be an incentive for entities to
access the value in the starting base more quickly than intended by
transferring starting base assets between mining project
interests. Such arrangements are also subject to the general
anti-avoidance rule, which is discussed in
Chapter 17.

Outline of chapter

â¢
how the low profit offset applies to fully or partially relieve
small miners of their Minerals Resource Rent Tax (MRRT) liability
for an MRRT year; and

â¢
the operation of the simplified MRRT.

8.2
All legislative references throughout this chapter are to the
Minerals Resource Rent Tax Bill 2011 unless otherwise
indicated.

Summary of new law

Low profit offset

8.3
There is no MRRT liability for miners with group mining profits (as
measured for MRRT purposes) of $50 million or less. Nil
liability is achieved through an offset, called a ‘low
profit’ offset.

8.4
To ensure that the low profit offset does not distort the
production behaviour of an entity approaching the $50 million
threshold, it phases-out for profits between $50 million and
$100 million.

Simplified MRRT

8.5
A miner can use the simplified MRRT method for an MRRT year if its
group profit (as measured for accounting purposes) is below certain
limits.

8.6
If a miner chooses to use the simplified MRRT method, it will have
no MRRT liability for the MRRT year, but its starting base and its
allowances are extinguished rather than carried forward.

Detailed explanation of new
law

Low profit offset

Mining profits equal to or less than
$50 million

8.7
The low profit offset shields miners from an MRRT liability when
the miner’s group mining profit of each mining project
interest is less than or equal to $50 million in an MRRT
year. [Subsection 45-5(1)]

8.8
A miner’s group mining
profits include the mining profits
(as measured for MRRT purposes) of entities that are connected to
or affiliated with the miner in the way described in Subdivision
328-C of the Income Tax
Assessment Act 1997 (ITAA 1997). [Subsection
45-5(1)]

8.9
If a miner’s group mining profit is less than or equal to
$50 million, the offset is the sum of the miner’s MRRT
liabilities for each of the miner’s mining project interests
for the year [subsection
45-5(2)] . This reduces a
miner’s MRRT liability to nil [section 10-15] .

8.10
The reason for basing the test on a miner’s
group mining
profits is to ensure that miner’s cannot split
their interests between different entities so that each falls below
the threshold and is able to access the offset.

Mining profits between $50 million and
$100 million

8.11
If an entity were fully liable for MRRT on mining profits once its
group mining profits exceeded the $50 million threshold, an
incentive would exist for the entity to delay production in order
to remain below the threshold. To remove this distortion,
this formula phases-out the offset for profits between $50 million
and $100 million:

[Subsection 45-10(1)]

8.12
If the miner’s group mining profit is over $50 million and
the formula produces a positive amount, the miner’s low
profit offset is:

[amount from the
formula] Ã MRRT rate

[Subsection
45-10(2)]

8.13
A miner’s group MRRT
allowances is the sum of the MRRT allowances for
each mining project interest for the year of the miner and its
closely associated entities. [Subsection
45-10(1)]

8.14
A miner’s share of group mining
profit is the sum of the miner’s mining profit
for each of its mining project interests for the year, divided by
the miner’s group mining profit for the year.
[Subsection 45-10(1)]

8.15
The taper
amount is the difference between the miner’s
group mining profit for the year and $50 million.
[Subsection
45-10(1)]

8.16
Where the result produced by this calculation is less than zero,
there is no low profit offset. Where the result is greater
than zero, the miner is entitled to a share of the offset amount
calculated by reference to its percentage share of the
group’s mining profits.

8.17
The phase-out reduces the maximum possible tax offset provided by
the low profit offset by $0.225 for every $1 of group mining
profits above $50 million.

8.18
Once the low profit offset entitlement is determined, it is applied
to reduce the miner’s MRRT liability for the year.
[Section
10-15]

Example
8.1 : Entitlement to a low profit offset
where mining profits are greater than $50 million and less than
$100 million

Strayan
Ltd works out if it is entitled to a low profit offset using
the following steps:

Step 1:
It works out its group mining profits as $80 million by adding the
mining profits of Project A and Project B and the group
MRRT allowances as $12.8 million by adding the total allowances of
Project A and Project B. As group mining profits
are greater than $50 million and less than $100 million,
Strayan Ltd may have a low profit offset.

Step 2:
It applies the formula as follows:

Taper
amount:

$80m â’
$50m = $30m

Miner’s
group MRRT allowances:

$4.6m + $8.2m
= $12.8m

Miner’s
share of group mining profits:

$60m/$80m =
75%

[($50m â’
$30m) â’ $12.8m] Ã 75% = $5.4m

Step 3:
Then it multiplies its share of the group profit by the MRRT
rate:

$5.4m
Ã 22.5% = $1.215m

Therefore, Strayan
is entitled to a low profit offset of $1.215
million.

8.19
The low profit offset is not intended to reduce compliance
costs. However, a miner with group mining profits below $50
million may also be eligible to use the simplified MRRT method,
which is intended to have that effect.

Simplified MRRT method

8.20
Some miners have the prospect of being below the $50 million MRRT
threshold for an extended period. Requiring such miners to
fully comply with the MRRT would be burdensome. These miners
will have the option of electing to use a simplified MRRT
method.

Choosing to use the simplified MRRT
method

8.21
To be able to make the simplified MRRT choice, a miner must satisfy
one of two alternative tests.

8.22
Under the first test, the aggregate of the miner’s group
profit (as measured for accounting purposes) must be less than
$50 million for the year. [Subsection
200-10(1)]

8.23
Therefore, the first test is similar to the low profit offset
test. Indeed, a miner that satisfies this requirement is
unlikely to have an MRRT liability in the year because its MRRT
profits should be sufficiently low as to fall below the $50 million
threshold for the low profit offset.

8.24
Under the second test, a miner is eligible for the simplified MRRT
method if the sum of the miner’s group profits is less than
$250 million. However, if the miner’s group
profits are less than $250 million, but it, or one of its
close associates, has a mining project interest with royalty
liabilities that are less than 25 per cent of the profit for that
interest for the year, the miner is ineligible for the simplified
MRRT. [Subsections 200-10(2) and
(3)]

8.25
The choice must be made in the approved form and the miner must
give it to the Commissioner of Taxation (Commissioner) by the date
its MRRT return would have been due, had it been required to lodge
one .
[Subsection 200-10(4),
and Schedule 1 to the MRRT (CA&TP) Bill, item 8, Division
119 of Schedule 1 to the Taxation Administration Act 1953 (TAA
1953)]

Group profit measured in accordance with
accounting principles

8.26
An entity’s profit for simplified MRRT purposes is its profit
from activities relating to the mining of taxable resources,
determined in accordance with general accounting principles, and
adjusted for interest, taxation, royalties and exceptional
items. [Section
200-15]

8.27
The adjustments for interest, taxation and exceptional items are
made in order to produce an amount that is a reasonable estimate of
the entity’s earnings before interest and taxation. The
further adjustment for royalties is to align the earnings before
interest and taxation amount with the treatment of royalties under
the MRRT.

8.28
The profit for simplified MRRT method purposes is intended as a
reasonable proxy for an entity’s mining profits that is
simpler to work out.

Consequences of
using the simplified MRRT method

8.29
If a miner chooses to use the simplified MRRT method for a year,
then:

â¢
the miner’s MRRT liability for each mining project interest
the miner has for the year is zero
[paragraph 200-5(a)] ;

â¢
all allowance components the miner has that relate to the mining
project interest, or a pre-mining project interest, are
extinguished [paragraph
200-5(b)] ;

â¢
the starting base assets that the miner has that relate to the
mining project interest cease to accrue starting base losses
[paragraph
200-5(c)] ; and

â¢
the entity does not have to lodge an MRRT return for the year
[Schedule 1 to the MRRT (CA&TP) Bill, item 8,
paragraph 117-5(4)(a) of Schedule 1 to the
TAA 1953] .

8.30
The allowance components are extinguished because a miner who
elects into the simplified MRRT method will have limited records
from which the historical tax attributes of a mining project
interest can be ascertained.

8.31
Miners that no longer satisfy either of the requirements for
electing into the simplified MRRT method or that opt not to elect
into it in a subsequent year would need to comply with their full
MRRT obligations in that subsequent year.

Outline of chapter

9.1
This chapter explains when mining project interests can combine and
the effects of such combination. What constitutes a mining
project interest is fundamental to the operation of the Minerals
Resource Rent Tax (MRRT).

9.2
Combined interests supersede the constituent interests as the basis
upon which MRRT liability is determined. Mining revenue,
mining expenditure and allowance components are tracked in relation
to combined interests.

9.3
All legislative references throughout this chapter are to the
Minerals Resource Rent Tax Bill 2011 unless otherwise
indicated.

Summary of new law

Combining mining project
interests

9.4
If a miner has two or more mining project interests that are
integrated, the mining project interests may be able to combine to
form a combined mining project interest.

9.5
Two mining project interests may be integrated if the mining
operations of the mining project interests are
integrated.

9.6
Pre-mining project interest cannot be integrated or combine.

9.7
Integrated mining project interests can only combine if the
combination will not result in the effective transferability of
otherwise quarantined allowance components.

9.10
If the integrated mining project interests cannot combine, the
miner can choose to cancel the allowance components that are
preventing combination to allow the interests to combine.

9.11
A miner that has a combined mining project interest will not have
to separately track mining revenue, mining expenditure, allowance
components and base values of starting base assets for each of the
constituent interests. Instead, the miner will only need to
track these amounts for the combined mining project
interest.

9.12
For the avoidance of doubt, mining project interests can combine
from 2 May 2010.

Detailed explanation of new
law

9.13
A miner that has a combined mining project interest will not have
to separately track mining revenue, mining expenditure, allowance
components and base values of starting base assets for each of the
constituent interests. Instead, the miner will only need to
track these amounts for the combined mining project
interest.

9.14
The combined interest will provide the basis upon which MRRT
liability is determined. The combined interest will inherit
the tax histories of all the constituent interests. The
combined mining project interest will aggregate each type of
allowance component that it inherits from the constituent
interests.

Integration of mining project
interests

9.16
Whether mining project interests are integrated is a question of
fact. If interests that were combined cease to be integrated
there will be a mining project split [paragraph
125-10(3)(d)] . (Chapter 10
deals with mining project splits, which occur when interests cease
to be integrated.)

9.17
Two mining project interests will be integrated on a
day if:

â¢
the same miner has the two interests [paragraphs 255-5(a) and 255-10(a)] ;

â¢
the interests relate to the same type of taxable resource (that is,
both relate to iron ore or both relate to coal) [paragraphs 255-5(b) and 255-10(b)] ;
and

â¢
the interests either:

-
relate to the same mine or proposed mine (upstream integration)
[paragraph
255-5(c)] ; or

-
are integrated in their downstream mining operations (or the mining
operations as a whole are integrated) and the miner has made the
choice to be downstream integrated [paragraphs 255-10(c) and
255-10(d)] .

9.18
Each of these conditions must be satisfied for two mining project
interests to be integrated. Integration is automatic when all
these conditions are satisfied.

The same miner must have the mining project
interests

9.19
The same miner must have each of the mining project interests for
them to be integrated [paragraphs 255-5(a) and
255-10(a)] . The miner will
have two or more mining project interests if it is the entity that
has each of the interests [section
15-5] .

9.20 If a group has made the
choice to consolidate for the MRRT, then all the mining project
interests that are within the group are taken to be the interests
of the head entity of the group. This is discussed in Chapter
16. The effect of this is that it allows mining project
interests that are held by different subsidiaries in the one MRRT
consolidated group to combine (provided they meet all the other
combination requirements). [Division 215]

The mining project interests must relate to the
same type of taxable resource

9.21
The mining project interests must all relate to the same type of
taxable resource. A mining project interest will either
relate to iron ore or it will relate in some way to coal.
[Paragraphs 255-5(b) and
255-10(b)]

9.22
A mining project interest will relate to iron ore if what is
extracted from the production right area is:

â¢
anything produced from consuming or destroying coal in situ [paragraph
20-5(1)(c)] .

Example
9.1 : Mining project interests relating to
iron ore

Rocky Resources
has two mining project interests. One mining project interest
is in respect of production right A, the other mining project
interest is in respect of production right B. Production
rights A and B both give Rocky Resources the authority to extract
iron ore.

The two mining
project interests that Rocky Resources has relate to iron
ore.

Example
9.2 : Mining project interests relating to
coal

Col Co has two
mining project interests. One mining project interest is in
respect of a production right that entitles Col Co to extract
coal. The other mining project interest is in respect of a
production right that entitles Col Co to burn the coal
in situ and extract
the gas produced.

The first mining
project interest relates to coal. The second mining project
interest relates to the gas produced by consuming the coal
in
situ .

Both mining
project interests that Col Co has relate to coal, meaning that this
integration condition is
satisfied.

Example
9.3 : Mining project interests that do not
relate to the same taxable resource

9.24
The mining project interests must relate to the same mine or
proposed mine to be upstream integrated. [Paragraph
255-5(c)]

What constitutes a mine

9.25
The concept of a mine takes its ordinary meaning.
Usually, a mine is understood to be a combination of resource
deposits, workings, and equipment and machinery needed to extract
or recover the resource from its naturally occurring state. A
mine can include underground excavations and surface workings.

9.26
The question of whether particular operations constitute one or
more mines is a question of fact and degree to be determined by
reference to all of the circumstances of a particular case.

9.27
The following are factors that may be relevant in determining if
one or more mines exists:

â¢
the extent and location of relevant ore bodies (noting that the
existence of a single ore body does not necessarily equate to the
existence of a single mine);

â¢
the geological and other connections between relevant ore
bodies;

â¢
the extent and location of the workings;

â¢
the extent and location of extraction facilities and the manner in
which they are operated;

â¢
systems for managing the extractive operations; and

â¢
the existence and content of relevant mine plans, prepared in
accordance with the Joint Ore Reserves Committee’s
Australasian Code for Reporting
of Exploration Results, Mineral Resources and Ore
Reserves (commonly known as the ‘JORC
Code’), governing production in relation to one or more ore
bodies.

Example
9.4 : Two separate mines

Coal Co has two
production rights, both of which entitle it to extract coal.
Coal Co has a mining project interest in relation to each of the
production rights.

Coal Co’s
head office manages the human resources for employees involved in
the upstream mining operations of the two mining project interests
without any distinction between the two production
rights.

Mine Co manages
the logistics of the upstream mining operations (that is,
extraction and transportation of the taxable resource from the
project areas to the valuation point). These activities are
managed separately in relation to each production right.
There is no shared upstream equipment or infrastructure, nor are
the extraction activities undertaken in a coordinated
manner.

The two mines are
distinct and cannot be considered to be the same mine. While
Coal Co has both of the relevant interests, and both interests
relate to coal, it does not operate the two sites as a single
mine. Integrated human resources management alone is not
enough to result in there being one mine.

As each mining
project interest has its own distinct mine, the mining project
interests are not upstream integrated.

Example
9.5 : One mine

MineCo Mining Pty
Ltd has two mining project interests in respect of two production
rights (A and B). It extracts coal from five open cut
pits. Two of the pits are located on production right A and
the other three pits are located on production right
B.

The five pits are
managed by a single management group and are covered by a single
life-of-mine plan. Mining equipment is shared
across the five pits and is continually transferred between pits
depending on mining needs at any given time. All production
employees are employed under a single enterprise bargaining
agreement. All administration and equipment maintenance
activities are performed from a central location and are shared
across all five pits.

All coal extracted
from the pits is hauled by trucks to a single
run-of-mine stockpile before being beneficiated
(screened, dewatered, separated and washed) through a coal
processing plant. The coal is then processed through the
plant to produce the saleable product and stored on a single
product stockpile. The saleable product is then loaded onto a
train and transported to port to be loaded for
export.

Taking all these
factors into account, MineCo Mining is operating one mine because
infrastructure and equipment is shared, there is a single
life-of-mine plan, the operations are managed by a
single management team and all the coal is placed on a single
stockpile. Therefore, the mining project interests are
upstream integrated.

What is a proposed mine

9.28
A proposed mine will be indicated by the existence of an ore body
and work preparatory to extraction. Such work might
include:

â¢
clearing the site;

â¢
installing water, light and power;

â¢
erecting housing and welfare facilities; and

â¢
locating equipment or machinery at the site.

Example
9.6 : One mine, multiple mining project
interests

Rock Doctor Co has
mining project interests in relation to each of its seven
production rights.

The production
rights are all governed by a single life-of-mine plan under which
production is scheduled to commence on all production rights within
a specified period.

Two production
rights have not commenced production. However, all production
rights are planned to be in production concurrently for a
significant number of years.

Rock Doctor Co is
producing from 11 open-cut pits across five of the production
rights. Rock Doctor Co has employees that work across all the
pits. Similarly, all the trucks and other infrastructure that
are used across the production rights are operated in an integrated
manner. There is one manager responsible for all 11
pits. All the coal extracted from these pits is taken to the
one run-of-mine stockpile. The same staff will also service
two non-producing production rights when they commence
production.

All of the ore
bodies are structurally connected and geologically
similar.

Taking all these
factors together, Rock Doctor Co is operating one mine.
Despite the fact that there are some timing differences, the ore
bodies are all connected and similar; the production rights are all
serviced, or will be serviced, by a single staff unit; the ore
bodies are being developed concurrently (albeit in a staggered
manner); and the operations are economically
integrated.

Therefore the
seven mining project interests are upstream integrated with each
other.

9.29
Two mining project interests are downstream integrated if either
the downstream mining operations for each of the interests, or the
mining operations as a whole for each of the interests, are
integrated and the miner has made a choice to be downstream
integrated. [Paragraphs 255-10(c)
and (d)]

Downstream mining
operations

9.30
Downstream mining operations are those mining operations that are
not upstream mining operations. Downstream mining operations
are those activities or operations that are necessary to get the
taxable resources from the valuation point and into the form and
location in which:

â¢
a mining revenue event happens to them [subparagraph 35-20(1)(b)(i)] ;
or

â¢
they are first applied to producing something in relation to which
a mining revenue event happens [subparagraph 35-20(1)(b)(ii)] .

[Sections 35-15,
35-20 and 255-15]

9.31
An activity or operation cannot, in the same instance, be both an
upstream and a downstream mining operation. However, the
costs of an activity may relate to both upstream and downstream
operations and may need to be apportioned between them on a
reasonable basis.

9.32
Operations or activities are not downstream mining operations if
they are undertaken after the taxable resources:

â¢
reach the form and location in which they are in at the mining
revenue event; or

â¢
are first applied to produce something in relation to which a
mining revenue event occurs.

[Subsections
35-20(1) and
255-15(1)]

Example
9.7 : Downstream mining operations

Deanna Coal Co has
a mine covering a single production right from which it extracts
coal that is exported to a foreign steel maker. Deanna has a
single mining project interest. The coal is sold as it is
loaded onto the ship at the port. The coal extracted is taken
to a run-of-mine stockpile.

The coal is
removed from the run-of-mine stockpile by a reclaimer and taken by
conveyer belt to a common crusher for easier processing. The
coal is then sent to a processing plant where it is screened,
de-watered and separated in order to produce the final
saleable product. That product is then taken from the
processing plant, loaded onto a train and transported to
port. At port, the coal is offloaded to stockpiles, from
which it is loaded on to ships in the same form that it leaves the
processing plant. That is, it is not blended at port with any
other coal. The coal is sold as it goes over the rail of the
ships.

Deanna’s
downstream mining operations begin when the coal is removed from
the run-of-mine stockpile (that is, the valuation point) and end
when it goes over the rail at port. This is because the coal,
at that point, is in the form and location it is in when it is sold
(the mining revenue event).

Fox Fines Pty Ltd
has two production rights which entitle it to extract iron
ore. Fox has a mining project interest in relation to each of
these production rights. The iron ore extracted from each
production right has different iron content. The miner
contracts with a foreign steel mill to provide iron ore of specific
iron content and the contract specifies that the iron ore is sold
as it is loaded on to a ship.

The iron ore
extracted from each production right is taken to
run-of-mine stockpiles, a different stockpile for each
production right. Iron ore is removed from a run-of-mine
stockpile and taken to a crusher and loaded onto trains operated by
a third party. The trains take the iron ore to a port where
it is deposited in separate piles. A quantity is taken from
each pile, blended into one product which is loaded onto ships,
such that the shipment satisfies the contractual iron
content.

The downstream
operations for each of Fox’s mining project interest begin
when the iron ore is removed from the respective run-of-mine
stockpiles and end as it goes over the ship’s
rail.

Integrated

9.33
‘Integrated’ takes its ordinary meaning. In
essence, things are integrated when separate elements come together
in a coordinated or interrelated manner.

9.34
Whether the downstream mining operations or the mining operations
of two mining project interests are integrated is a question of
fact, but must be determined having regard to the manner in which
those operations are carried on, including the way in which
infrastructure and equipment is used and operated.
[Paragraph 255-10(c)]

9.35
If the mining operations are managed as an integrated operation,
demonstrated through the same downstream infrastructure being used
or operated in an integrated manner in respect of production from
the mining project interests, then the downstream integration tests
will be met.

9.36
The integration test would not be satisfied just because two or
more mining project interests utilise the same downstream
infrastructure. They would need to be integrated in the way
they use that infrastructure. For example, integration may be
demonstrated through the scheduling and use of the infrastructure,
to combine resources from different mining project interests into a
blended product.

Example
9.9 : Downstream integration — blended
product

Riley Co has five
mines, each of which is a single mining project interest.
Each mine has its own run-of-mine stockpile. In addition,
each mine extracts iron ore with different iron
content.

Riley Co also owns
and operates a rail network system which is connected to each of
the run-of-mine stockpiles. The iron ore is taken from the
various run-of-mine stockpiles and delivered to Riley Co’s
trains, which travel on the rail network to the port facility,
which it also owns and operates. At port, iron ore from each
of the mines is delivered to separate holding piles, according to
the iron content. Riley Co then blends ore from the various
piles in order to load a shipment with the required iron
content.

Riley Co contracts
with overseas customers to deliver iron ore, with specified iron
content, to ships at its port. Riley Co’s contracts
specify that the iron ore is sold to its customers on a
free-on-board basis.

Riley Co schedules
the extraction activities and transportation of the extracted ore
from each of the mines in a way that ensures it has a constant
supply of iron ore of varying iron content at the port
stockpiles.

Taking into
account the manner in which the operations are carried out and the
extensive integration of infrastructure used and operated in
carrying out these operations, each of the mining project interests
that Riley Co has are downstream integrated.

Example
9.10 : Downstream integration —
undertaken by a third party on behalf of the miner

Lachlan Co has
three coal mines, each of which is a separate mining project
interest. Coal from each mine is of slightly varying
qualities and must be blended to be of a quality that satisfies
customer requirements.

Lachlan Co has a
service agreement with Train Corp (an entity unrelated to Lachlan
Co) whereby Lachlan Co delivers coal from each of its run-of-mine
stockpiles to Train Corp trains for transport to port.
Lachlan Co pays Train Corp a fee for its transport service.
Lachlan Co’s coal is delivered to a port which is owned and
operated by Port Coal Services Pty Ltd (PCS). PCS is
unrelated to Lachlan Co. Lachlan Co’s coal is stored in
stockpiles at the port facility until it is loaded onto ships to
fulfil Lachlan Co’s contracts with overseas customers.
Lachlan Co’s sales contracts specify that the coal is sold on
a ‘free on board’ basis. Before Lachlan
Co’s coal is loaded onto ships, PCS blends the varying
quality of coal to a blend that satisfies the contract
description. PCS provides this service to Lachlan Co for a
fee.

Although none of
the downstream mining operations are owned or operated by Lachlan
Co, the transporting and blending at port are necessary to get the
coal into the form and location in which it is sold and are the
downstream mining operations of Lachlan Co in relation to its
mining project interest. Due to the manner in which the
downstream operations are carried on and the integrated way
infrastructure is used in carrying out those downstream operations,
the downstream mining operations of each of the mining project
interests that Lachlan Co has are integrated for the purpose of the
MRRT.

Mining Co has 10
coal mines, each of which is a separate mining project
interest. Each mine is operated under a separate life-of-mine
plan and has a separate run-of-mine stockpile. The coal is
removed from the run-of-mine stockpiles and taken to separate coal
preparation plants.

Mining Co has
service agreements in place with multiple rail and port
operators. Mining Co schedules the transportation of coal on
the rail corridors and delivery to the port in a way that ensures
that the timing and rate of extraction from each of the mining
project interests is managed having regard to the quality,
characteristics and volume across the overall system.
Contracted capacity for the rail corridors and the port is managed
in order to ensure reliable supply to customers in accordance with
contract descriptions and market demand.

Mining Co has a
dedicated production, rail and port infrastructure team that is
responsible for managing the outbound supply chain. This team
is accountable for the integrated planning of the rail corridors
and the port. Sales and operations planning and supply chain
performance management is managed for each of Mining Co’s
mining project interests centrally. The scheduling of
activities downstream of the run-of-mine stockpiles is
undertaken in an integrated manner.

Each of the mining
project interest that Mining Co has is integrated because of the
way in which it conducts its downstream operations, taking into
account the overall mining operations, are highly
coordinated.

Example
9.12 : Downstream integration — single
processing plant

Francis Coking
Coal has four production rights (A, B, C, and D). There is a
mining project interest in respect of each production right.
On production right A, there are three underground coal mines (A1,
A2 and A3). On production rights B, C and D there are three
open cut pits.

Premium coking
coal is extracted from the three underground mines located in
production right A and medium quality coking coal, pulverised coal
injection coal and thermal coal is extracted from the three open
cut pits (on B, C and D). Each of the underground and open
cut pits has its own run-of-mine stockpile. The coal from
each run-of-mine stockpile is then conveyed on a series
of overland conveyors to a single coal processing
plant.

All the coal from
both the underground and open cut operations is processed through a
single coal processing plant in which the coal is beneficiated
(screened, dewatered, separated and washed) to produce saleable
product. As part of the beneficiation process, lower quality
coal from the open cut pits is blended in the processing plant with
the premium coking coal from the underground operations to produce
a hybrid saleable product. The beneficiated coal is then
stored on a common product stockpile area, separated according to
the type and quality of coal. The saleable product is then
loaded onto trains and transported to port to be loaded for
export.

Francis Coking
Coal’s mining project interests are downstream integrated,
due to the coordinated manner in which the coal is processed and
transported.

Downstream integration
choice

9.37
Even if the downstream mining operations of the mining project
interests are factually integrated and the other conditions for
integration are satisfied, the interests will not be downstream
integrated unless the miner has made a choice to treat the
interests as integrated. [Paragraph 255-10(d) and section
255-20]

Example
9.13 : Integrated operations, but no choice
has been made

On 1 July 2012,
Geologue Jacqueline Pty Ltd has two mining project interests, each
relating to coal. The two interests do not relate to the same
mine but their downstream mining operations are factually
integrated.

Geologue
Jacqueline Pty Ltd has not made the choice to downstream
integrate. Therefore, despite the downstream mining
operations being factually integrated, the two interests are not
recognised as integrated for the MRRT.

9.38
The downstream integration choice does not lapse. Once made,
the choice operates to integrate all mining project interests that
the miner has, including subsequent mining project interests that
the miner acquires (so long as they satisfy the other conditions
for downstream integration). [Section
255-20]

9.39
The choice will have effect from the day the choice is made, or the
day all the other conditions for downstream integration are met,
whichever is later. Put simply, two mining project interests
will be integrated when they meet all the downstream integration
conditions, including the making of a valid choice.
[Section
255-10]

9.40
The choice to downstream integrate will cease to have effect in
relation to a particular mining project interest after the miner
that made the choice stops having the interest. [Subsection 255-20(3)]

Example
9.14 : Integrated on day of choice

Following on from
the example above, Geologue Jacqueline Pty Ltd chooses downstream
integration on 27 February 2013. Geologue Jacqueline’s
two mining project interests will be integrated with each other
from 27 February 2013.

Example
9.15 : Choice made in advance of integrated
operations

On 1 July 2012,
Bowen Integrated Materials Co (BIM Co) holds several mineral
development licences in various locations throughout the Bowen
Basin. BIM Co is in the process of obtaining production
rights in respect of the mineral development licences. BIM Co
plans to manage the downstream mining operations in relation to
each of the production rights as an integrated operation. BIM
Co has determined it would want the mining project interests to be
recognised as integrated for the purpose of the MRRT (if they are
factually integrated in their downstream mining
operations).

On 23 April 2013,
the production rights are granted in relation to each of the
mineral development licences. BIM Co, now a miner with mining
project interests, also makes the downstream integration choice on
that day.

BIM Co satisfies
all of the other conditions for downstream integration on 1
September 2013. Each of the mining project interests
that BIM Co has are integrated
with the other interests from
1 September 2013.

Retrospective downstream
integration

9.41
A transitional rule allows the downstream integration choice to
have retrospective effect in limited circumstances. These
limited circumstances are where the conditions for integration,
excluding the making of the choice, are satisfied in respect of
mining project interests between 2 May 2010 and 30 June 2012.
In such cases, if the miner makes the choice on or before the
lodgement date for the MRRT return for the first MRRT year, the
interests will be taken to have been integrated from the time all
the other conditions were satisfied. [Schedule 4 to the Minerals Resource Rent Tax
(Consequential Amendments and Transitional Provisions) Bill 2011
(MRRT (CA&TP) Bill), subitem
7(2)]

9.42
This transitional rule takes account of the fact that a miner
cannot make a downstream integration choice before 1 July
2012. Regardless, two mining project interests should still
be able to be treated as integrated at an earlier time. This
enables mining project interests to be integrated from 2 May
2010, despite the miner not having made a choice at that time.

Example
9.16 : Downstream mining operations —
transitional choice

On 2 May 2010,
Miner Co has two production rights which entitle it to extract iron
ore. The downstream mining operations in relation to each of
the production rights are integrated.

Upon commencement
of the MRRT, Miner Co will be taken to have two mining project
interests in relation to the two production rights at 2 May
2010. Each interest relates to iron ore and the downstream
mining operations of the interests are
integrated.

Miner Co makes the
downstream integration choice at the time it lodges its MRRT return
in relation to the first MRRT year.

Despite having not
made the downstream integration choice on 2 May 2010,
once it makes the choice Miner Co’s interests will be treated
as integrated with each other from 2 May
2010.

Combining mining project
interests

9.43
For the most part, mining project interests that can combine, must
combine. Combination is automatic and not optional.
[Section 115-10)]

9.44
Unlike integration, which tests the relationship between two mining
project interests, combination applies to a collection of mining
project interests. Mining project interests must combine to
the fullest extent possible. For example, a miner cannot
choose to only combine two mining project interests if there are
actually four interests that can combine.

9.45
Mining project interests (‘constituent interests’) that
combine are taken to be a single mining project interest
(‘combined interest’) for the purposes of the MRRT
law. [Subsection
115-10(1)]

9.46
The constituent interests are not recognised as a combined interest
for the purpose of testing whether they must combine. This is to
allow the integration provisions to look-through the combined
interest and test whether the constituent interests are
integrated. [Subsection
115-10(1)]

9.47
Mining project interests are taken to be a combined interest from
the time the constituent interests can combine. This time is
called the ‘combining time’. [Subsection
115-10(1)]

9.48
Combination is not an annual test. It is determined at and
from the combining time. However the miner is liable to pay
MRRT for the combined interest as if the constituent interests had
been combined from the beginning of the MRRT year.
[Subsection 115-10(1) and section
115-40]

9.49
A number of conditions must be satisfied for mining project
interests to combine. Integration is the first condition for
combination. Only interests that are integrated with each of
the other interests can combine. [Paragraph
115-10(1)(a)]

9.50
Integrated mining project interests can only combine if:

â¢
any royalty credits that any of the interests has would be able to
be applied in working out a transferred royalty allowance for each
of the other interests [paragraph 115-10(1)(b) and
section 115-20] ;

â¢
any pre-mining loss that any of the interests has (or would
have if the MRRT year were to end at the combining time) would be
able to be applied in working out a transferred pre-mining
loss allowance for each of the other interests [paragraph 115-10(1)(c) and section
115-25] ;

â¢
any mining loss that any of the interests has (or would have if the
MRRT year were to end at the combining time) would be able to be
applied in working out a transferred mining loss allowance for each
of the other interests [paragraph 115-10(1)(d) and section
115-30] ; and

â¢
any of the interests that has a starting base loss or a starting
base asset:

-
existed on 2 May 2010 (or originated from a
pre-mining project interest that existed on 2 May 2010)
[paragraphs 115-10(1)(e) and
115-35(a)] ;
and

-
has been held, at all times since 2 May 2010, by the same miner as
held all the other constituent interests (or the pre-mining
project interests from which they originated) [paragraphs 115-10(1)(e) and
115-35(b)] .

9.51
A constituent interest that has had a suspension day is unable to
combine. See Chapter 11 for a discussion on suspension days.
[Subsection 115-10(3)]

9.52
These conditions must be satisfied to ensure that combination does
not enable the transferability of either quarantined tax history or
future starting base losses.

9.53
If integrated mining project interests are unable to combine
because they have allowance components that do not meet the above
criteria, the miner can nonetheless make a choice to combine.
However, this would have the effect of cancelling those allowance
components that otherwise prevent it from combining.
[Section
115-15]

9.54
If two mining project interests are integrated with each other and
neither interest has a royalty credit, pre-mining loss,
mining loss, starting base loss or starting base asset, the
interests can and must combine.

Royalty credits must be transferable to
combine

9.55
If any of the integrated mining project interests has a royalty
credit, it can only combine if all the royalty credits are fully
transferable to each of the other interests. Chapter 6
explains what a royalty credit is and when one arises.
[Section
115-20]

9.56
Royalty credits are transferable if they would be available to be
applied in working out a transferred royalty allowance for each of
the other interests. That is, they are transferable if the
mining project interests have been integrated from the time the
royalty credit arose until the time the mining project interests
are seeking to combine (and the royalty credit did not arise when
the interest was using the alternative valuation method).
[Subsection
65-20(1)]

9.57
In determining whether the royalty credits would be transferable it
does not matter whether the royalty credit would have been used by
another mining project interest if it was actually available to be
applied. [Paragraph 115-20(b)]

Example
9.17 : Royalty credits not fully
transferable

Miner Co has two
mining project interests, one of which existed at
1 July 2012 and another that was acquired in 2013 from
another miner. On 1 July 2014, the interests become
integrated in their upstream mining operations. At the time
of integration, each interest has royalty credits for the previous
MRRT year. The two interests are unable to combine as they
each have royalty credits that arose prior to the interests being
integrated. (However, the mining project interests may be
able to transfer future royalty credits that arise while the two
mining project interests are integrated with each
other.)

9.58
If any of the royalty credits arose while the mining project
interests were not integrated, or they arose when using the
alternative valuation method, the mining project interests will be
unable to combine unless the miner makes a choice to cancel the
royalty credits and enable the combination. This is discussed
below. [Section
115-15]

Pre-mining losses must be transferable to
combine

9.59
If any of the integrated mining project interests has a
pre-mining loss (or would have a pre-mining loss if the
MRRT year ended at the combining time) they can only combine if all
the pre-mining losses are fully transferable to each of the
other integrated mining project interests. Chapter 6 explains
what a pre-mining loss is and when one arises.
[Section 115-25]

9.60
A mining project interest would have a pre-mining loss if the
MRRT year were to end at the combining time, if the
pre-mining expenditure for the interest for the period from
the start of the combination year until the combining time exceeds
the pre-mining revenue for the interest for the same
period.

9.61
A mining project interest will only have pre-mining revenue
and pre-mining expenditure for the combination year if the
mining project interest originated from a pre-mining project
interest during the combining year but before the combining
time.

9.62
Pre-mining losses are transferable if they are available to
be applied in working out a transferred pre-mining loss
allowance for the other mining project interests. That is,
the mining project interests must relate to the same type of
taxable resource (that is, iron ore or coal), the mining project
interests must be held by the same miner or by close associates and
the common ownership test must be satisfied. [Section
95-20]

9.63
If one of the mining project interests is a combined interest, for
the pre-mining loss to be transferable to the combined
interest it must be transferable to each of the constituent
interests. [Paragraph 115-25(b)
and section 115-55]

9.64
In determining if the pre-mining loss would be transferable,
it does not matter whether the pre-mining loss would have
actually been used by another mining project interest.
[Subparagraph 115-25(a)(ii)]

9.65
If the pre-mining losses are not available for transfer, the
two mining project interests will be unable to combine, unless the
miner makes a choice to cancel the pre-mining losses to
enable the combination. This is discussed below.
[Section
115-15]

Mining losses must be transferable to
combine

9.66
If any of the integrated mining project interests has a mining loss
(or would have a mining loss if the MRRT year ended at the
combining time) it can only combine if all the mining losses are
fully transferable to each of the other integrated mining project
interests. Chapter 6 explains what a mining loss is and when
one arises. [Section 115-30]

9.67
A mining project interest would have a mining loss if, the MRRT
year were to end at the combining time, the mining expenditure for
the interest for the period from the start of the combination year
until the combining time would exceed the mining revenue for the
interest for the same period.

9.68
Mining losses are transferable if they are available to be applied
in working out a transferred mining loss allowance for the other
mining project interests. That is, they are transferable if
the mining project interests relate to the same type of taxable
resource (that is, iron ore or coal), the mining project interests
satisfy the common ownership test and the mining loss did not arise
when the interest was using the alternative valuation method.
[Subsection
100-20(1)]

9.69
If one of the mining project interests is a combined interest, for
the mining loss to be transferable to the combined interest it must
be transferable to each of the constituent interests.
[Paragraph 115-30(b) and section
115-60]

9.70
In determining if the mining loss would be transferable, it does
not matter whether the mining loss would have actually been used by
another mining project interest. [Subparagraph 115-30(a)(ii)]

9.71
If the common ownership test is not satisfied or any of the mining
losses arose when using the alternative valuation method, the two
mining project interests will be unable to combine, unless the
miner makes a choice to cancel the mining losses to enable the
combination. This is discussed below. [Section
115-15]

Example
9.18 : Mining losses not fully
transferrable

Miner Co has two
mining project interests. It has always had one of the
interests but it only acquired the other interest recently.
The second interest it acquired has a mining loss for a previous
MRRT year.

The mining loss of
the second interest cannot be applied in working out a transferred
mining loss allowance of the first interest, as the common
ownership test is not satisfied.

The two interests
are unable to combine as the second interest has a mining loss that
is unable to be transferred to the first
interest.

Starting base losses and starting base assets
— the same miner must have had the interests from 2 May
2010

9.72
If any of the integrated mining project interests have a starting
base loss or a starting base asset, the interests can only combine
if they existed, or originated from a pre-mining project interest
that existed, on 2 May 2010 and at all times since that
time the miner that has each of the interests (or the
pre-mining project interest from which it originated) is the
same miner. [Section
115-35]

9.73
If mining project interests that were not held by the same miner at
that time but which had starting base losses or assets were able to
combine, this would effectively allow starting base losses to be
transferred from the old interest to the new interest.
Chapter 7 explains when a miner has a starting base loss and
a starting base asset. Chapter 6 explains what a
pre-mining project interest is and when a mining project
interest originates from a pre-mining project interest.

9.74
A mining project interest that has a starting base loss or a
starting base asset may be able to combine with another interest,
if both interests (or the pre-mining project interests from
which they originated) existed on 2 May 2010.
[Paragraph
115-35(a)]

9.75
If the mining project interests (or the pre-mining project
interests from which they originate) existed on 2 May 2010, the
interests can combine if they have always been held by the same
miner as each other. [Paragraph
115-35(b)]

9.76
This enables all mining project interests of a miner that relate to
exploration or production rights that existed on 2 May 2010 to be
capable of combining with other interests that existed on this date
(subject to the other conditions).

Example
9.19 : Pre-mining project interest
existing on 2 May 2010

Expo Co holds an
exploration right at 2 May 2010, in respect of which there is a
pre-mining project interest. Subsequently, Expo Co is
granted a production right that covers an area that the exploration
right covered. The production right originates from the
exploration right, therefore the mining project interest that Expo
Co now has originates from the pre-mining project
interest.

The
pre-mining project interest from which the mining project
interest originated existed on 2 May 2010 and is therefore capable
of combining with other interests that existed on 2 May 2010
(subject to the other conditions).

Example
9.20 : Pre-mining project interest not
existing on 2 May 2010

At 2 May 2010,
Digger Co is in the process of finalising its application to obtain
an exploration right. The exploration right was granted on
1 July 2010, triggering the existence of a pre-mining
project interest. Subsequently, Digger Co is granted a
production right that covers an area that the exploration right
covered. The production right originates from the exploration
right, therefore the mining project interest originates from the
pre-mining project interest.

The
pre-mining project interest from which the mining project
interest was derived did not exist on 2 May 2010, it only started
to exist on 1 July 2010. Therefore, it is unable to combine
with other interests that existed on 2 May 2010.

9.77
Requiring the same miner to have each of the mining project
interests is similar to the ownership requirement in the common
ownership test for transferred mining loss allowances. One
important distinction is that, for the purpose of determining
whether mining project interests can combine, the same miner must have the mining
project interests; it is not sufficient that a closely associated
miner has that interest .
If a consolidated group has made the choice to consolidate for MRRT
purposes, the head company will be the miner that has all mining
project interests that exist within the group.

9.78
A change of ownership does not necessarily stop interests from
being combined. Rather, the test focuses on the relationship
between the two mining project interests and considers whether they
have always been held by the same miner, even if the identity of
that miner has changed from time to time. As long as there
has been no interruption to the relationship, the mining project
interests will have always been held by the same miner.

Example
9.21 : Same miner has mining project
interests

Miner Co has two
mining project interests at 2 May 2010. Each of those mining
project interests has starting base assets that will be depreciated
in relation to the mining project interests. On
1 October 2012, Miner Co sells the two interests to CHPP
Ltd.

From 2 May 2010 to
30 September 2012, Miner Co had the interests. From 1 October
2012 onwards, CHPP Ltd had the two interests.

Despite different
miners having the interests, at all times both interests have been
held by the same miner.

Example
9.22 : Same miner has not had mining project
interests

Head Co is the
head entity of a consolidated group for income tax purposes.
A Co and B Co are subsidiaries of Head Co.

Head Co has not
made the choice to consolidate for the purposes of the MRRT.
Therefore, A Co is a miner as it has mining project interest 1 (MPI
1) and mining project interest 2 (MPI 2). B Co is also a
miner as it has mining project interest 3 (MPI
3).

A Co and B Co have
had their respective MPI’s since 2 May
2010.

MPI 3 cannot
combine with MPI 1 or MPI 2 as the miner that has MPI 3 (B Co)
and the miner that has MPI 1 and MPI 2 (A Co) are not the same
miner.

MPI 1 and MPI 2
can combine as A Co has both the mining project
interests.

Example
9.23 : Combination in the case of
acquisition of a group

Following on from
the example above, Mega Co is the head entity of a consolidated
group for the purpose of income tax and the MRRT. Mega Co has
three subsidiaries, D Co, E Co and F Co, each of which has a mining
project interest, respectively, MPI 4, MPI 5 and MPI 6.
Because Mega Co has made the choice to consolidate for the purpose
of the MRRT, Mega Co is the miner and has MPI 4, MPI 5 and MPI
6. D Co, E Co and F Co are not entities recognised for MRRT
purposes.

On 1 July 2015,
Mega Co acquires Head Co. Head Co is now part of Mega
Co’s consolidated group, therefore Mega Co is now the miner
in relation to MPI 1, MPI 2 and MPI 3.

Assume all of the
mining project interests have starting base assets with base
values.

Mega Co can,
provided all the other combination conditions are met, combine all
the mining project interests that it now has, provided the same
miner has always had each of the interests.

Therefore, Mega Co
can combine MPI 1 and MPI 2. It can also combine MPI 4, MPI 5
and MPI 6. MPI 3 is unable to combine as there is no other
mining project interest that shares its ownership
history.

Which miner has the
MPI?

Same miner as each
other?

2 May 2010 — 30 June
2015

1 July 2015
onwards

MPI 1

A Co

Mega Co

The same miner has always had MPI 1
and MPI 2

MPI 2

A Co

Mega Co

The same miner has always had MPI 1
and MPI 2

MPI 3

B Co

Mega Co

No other MPI has the same ownership
history as MPI 3

MPI 4

Mega Co

Mega Co

The same miner has always had MPI 4,
MPI 5 and MPI 6

MPI 5

Mega Co

Mega Co

The same miner has always had MPI 4,
MPI 5 and MPI 6

MPI 6

Mega Co

Mega Co

The same miner has always had MPI 4,
MPI 5 and MPI 6

Upon
combination, Mega Co will be left with three mining project
interests. Two combined interests, one comprising MPI 1 and
MPI 2 and the other comprising MPI 4, MPI 5 and MPI 6, and the
mining project interest that cannot combine with any of the others,
MPI 3.

Choice to combine — cancellation of
allowance components

9.79
If a miner has interests that are unable to combine because doing
so would enable the transferability of either quarantined tax
history or future starting base losses, the miner can make a choice
to combine. [Subsection
115-15(1)]

9.80
The effect of making the choice is that any allowance components
that are otherwise preventing the interests from combining are
cancelled. This includes reducing the base value of starting
base assets to zero. [Subsection
115-15(2)]

9.81
Not all the allowance components are necessarily cancelled, only
those which are preventing combination from being allowed.

9.82
This choice is intended to give a miner the ability to combine
without first having to use up the allowance components that are
preventing it from combining.

Sprinklingheart
Resources is a miner with two integrated mining project interests
(MPI 1 and MPI 2).

MPI 2 has no
allowance components. MPI 1 has unapplied mining losses for
the 2013, 2014 and 2015 MRRT years. The 2014 and 2015 losses
are transferable to MPI 2, however, the 2013 losses are
not.

As some of the
mining losses are not transferable, MPI 1 and MPI 2 are unable to
combine.

Sprinklingheart
Resources makes a choice to combine. Having made this choice,
the carried forward mining losses for the 2013 MRRT year are
cancelled. MPI 1 retains the mining losses for the 2014 and
2015 MRRT years.

MPI 1 and MPI 2
combine. The combined interest will therefore inherit MPI
1’s mining losses for the 2014 and 2015 MRRT
years.

Effects of combining mining project
interests

Inherited history

9.83
The MRRT liability for the whole MRRT year will rest with the miner
who has the combined interest at the end of the MRRT year.
[Section
115-40]

MRRT liability

9.84
In the year in which the constituent interests combine, called the
‘combining year’, the miner that has the combined
interest will be liable to pay MRRT that is payable in relation to
the combined interest, as if the constituent interests had been
combined from the start of the year. The miner is not
separately liable to pay MRRT in relation to the constituent
interests. [Section
115-40]

9.85
The miner will also be liable to pay MRRT that is payable in
relation to the combined interests for future MRRT years (provided
the constituent interests remain combined and the miner continues
to have the combined interest). [Section 10-1]

9.86
The allowance components of the constituent interests are taken to
be the allowance components of the combined mining project
interest. [Section
115-45]

9.87
The royalty credits of the constituent interests are inherited by
the combined interest. Royalty credits are not aggregated (as
they arise for a particular day and not annually for an MRRT
year). [Subsection 115-45(1)]

9.88
Pre-mining losses that the combined interest inherits from
the constituent interests are aggregated to the extent they relate
to the same MRRT year. [Subsection
115-45(2)]

9.89
Mining losses that the combined interest inherits from the
constituent interests are aggregated to the extent they relate to
the same MRRT year. [Subsection
115-45(3)]

9.90
Starting base losses that the combined interest inherits from the
constituent interests are aggregated to the extent they relate to
the same MRRT year and have had the same starting base valuation
method applied (that is, book value or market value).
[Subsections 115-45(4) and (5) and
section 115-50]

Starting base losses — where some starting
base assets are subject to book value and others to market
value

9.91
The starting base valuation method is a choice a miner makes in
relation to a mining project interest. The constituent
interests that relate to the combined interest may have different
starting base valuation methods applied to value their starting
base assets. Book value and market value starting base losses
are subject to different uplift rates and therefore cannot be
aggregated in the same way as pre-mining losses and mining
losses. [Subsections 115-45(4)
and (5) and section 115-50]

9.92
The aggregated book value starting base losses will be subject to
the book value uplift long term bond rate + 7 per cent (LTBR + 7
per cent) and the aggregated market value starting base losses will
be subject to the market value uplift consumer price index
(CPI). [Section
115-50]

9.93
The starting base losses for the constituent interests that the
combined interest is taken to have are not necessarily
aggregated. Rather, the starting base losses are only
aggregated to the extent they relate to the same valuation approach
for an MRRT year. [Section
115-50]

9.94
If some starting base assets were initially valued using book value
and others using market value, the miner will have two starting
base losses for the combined interest for the MRRT year, a book
value starting base loss and a market value starting base
loss. [Section
115-50]

9.95
The book value starting base loss for an MRRT year will be the sum
of the book value starting base losses that would have arisen for a
constituent interest for the MRRT year. The market value
starting base loss for an MRRT year will be the sum of the market
value starting base losses that would have arisen for a constituent
interest for the MRRT year. [Subsections 115-50(2) and
(3)]

9.96
The two starting base losses will be applied in working out the
starting base allowance for the miner. The starting base
losses that relate to book value will be applied first, then the
starting base losses that relate to market value.
[Subsection
115-50(4)]

Miner Co has two
mining project interests, MPI A and MPI B. Miner Co made the
choice to use the book value starting base methodology for starting
base assets that relate to MPI A and MPI B.

From 1 July 2015,
MPI A and MPI B are taken to be a combined interest, MPI AB.
At the combining time, MPI A had a $200 starting base loss for the
2013 year and a $500 starting base loss for 2014 year and MPI B had
a $100 starting base loss for the 2013 year and a $200 starting
base loss for the 2014 year.

Upon combination,
MPI AB will be taken to have the starting base losses that relate
to MPI A and MPI B and the starting base losses for each year will
be aggregated as they apply to the same starting base valuation
method. Therefore, MPI AB will have a book value starting
base loss for the 2013 year of $300 ($200 + $100) and a book value
starting base loss for the 2014 year of $700 ($500 +
$200).

Assume all the
same facts as the previous example, except this time Miner Co has
made the choice to use the book value methodology in relation to
MPI A and the market value methodology in relation to
MPI B.

Upon combination
MPI AB will be taken to have the starting base losses that relate
to MPI A and MPI B but none of the losses will be aggregated as
different starting base valuations applied in relation to the
starting base losses. Therefore, MPI AB will have book value
starting base losses for 2013 and 2014 of $200 and $500
respectively and market value starting base losses for 2013 and
2014 of $100 and $200 respectively.

In the 2015 MRRT
year, MPI AB has a mining profit.
Assume MPI AB has a $100
book value starting base loss and a $100 market value starting base
loss for the 2015 year. When it comes time to calculate the
starting base allowance for MPI AB there is $1,000 remaining mining
profit, therefore the starting base allowance cannot exceed
$1,000.

In working out the
starting base allowance, the book value starting base losses are
applied first, then the market value starting base losses.
Therefore, MPI AB will apply the starting base losses in the
following order, $200 book value starting base loss for the 2013
year (attributable to MPI A), $500 book value starting base loss
for the 2014 year (attributable to MPI A), $100 book value starting
base loss for the 2015 (attributable to MPI A), $100 market value
starting base loss for the 2013 year (attributable to MPI B) and
$100 of the $200 market value starting base loss for the 2014 year
(attributable to MPI B). The remaining $100 from 2014 and the
$100 from 2014 (both market values starting base losses) will be
carried forward to 2016 and uplifted by the CPI.

Choices

9.97
The downstream integration choice and the simplified MRRT choice
both apply to all mining project interests a miner has. When
the constituent interests combine, if the miner had made a
downstream integration choice or a simplified MRRT choice, these
choices will continue to apply to the combined interest.

9.98
Similarly, the starting base valuation choice, while made in
respect of a mining project interest, continues to apply to the
starting base assets as per the choice made by the miner in
relation to the constituent interests.

9.99
An alternative valuation method choice made in respect of a
constituent interest will have no effect on the combined
interest. [Section 115-65]

9.100
The miner can, if it meets the requirements, choose to use the
alternative valuation method in respect of the combined
interest.

Transfer of pre-mining losses and mining
losses to and from a combined interest

9.101
There are special rules for transferring pre-mining losses
and mining losses to or from a combined interest.
[Sections 115-55 and 115-60]

9.102
When a miner is seeking to transfer a pre-mining loss, or a
mining loss, to or from a combined interest, the common ownership
tests for the respective losses must be satisfied in relation to
each of the constituent interests and the other mining project
interest that is transferring or accepting the loss. [Sections 115-55 and
115-60]

9.103
This rule only applies in relation to pre-mining losses and
mining losses that arose in an MRRT year before the combining year, as each
of the constituent interests will have the same ownership from the
time of combination onwards. [Paragraphs 115-55(1)(b) and (2)(b)
and 115-60(1)(b) and (2)(b)]

9.104
This rule applies regardless of whether a pre-mining loss or
a mining loss is otherwise transferable under the general transfer
rules. [Subsections 115-55(3) and
115-60(3)]

Example
9.27 : Unable to transfer mining losses to
combined interest

At the beginning
of the 2016 MRRT year, Miner Co has five mining project interests
(MPIs). Since 1 July 2012, Miner Co has always had MPI 1, 2,
4 and 5. Miner Co acquired MPI 3 at the beginning of the 2014
MRRT year.

MPIs 1 to 4 became
factually integrated from the start of the 2016 MRRT year and do
not have any allowance components, so they combine from the
beginning of the 2016 year. MPI 5 is unable to combine as it
is not integrated with any of the other interests. The
combined interest makes a mining profit for the 2016 MRRT
year. MPI 5 has a mining loss from 2013 and makes another
mining loss in 2016.

The combined
interest still has a remaining mining profit when it comes time to
apply the transferred mining loss allowance. To determine
whether the mining loss for MPI 5 for the 2013 MRRT year can be
applied in working out the transferred mining loss allowance of the
combined interest, the common ownership test needs to be satisfied
in relation to MPI 5 and each of the constituent interests, MPIs 1
to 4.

The common
ownership test will be satisfied if the same miner had MPI 5 and
each constituent interest from the start of the year for which the
mining loss arose until the end of the year for which the mining
loss is being transferred.

The common
ownership test will not be satisfied for MPI 5 and constituent
interest MPI 3 as Miner Co only acquired MPI 3 at the beginning of
the 2014 MRRT year.

Therefore, the
2013 mining loss of MPI 5 cannot be applied in working out the
transferred mining loss allowance of the combined interest for the
2016 MRRT year.

Application and transitional
provisions

9.105
Mining project interests can combine from 1 July 2012.

9.106
However, there is a transitional provision that ensures mining
project interests can be taken to be combined from a time earlier
than 1 July 2012, provided they satisfy all the other
conditions for combination. [Schedule 4 to the MRRT (CA&TP) Bill, subitem
7(1)]

9.107
Allowing mining project interest to be able to combine from
2 May 2010 is particularly important for the purpose of
working out the starting base for mining project interests.

Outline of chapter

10.1
This chapter explains when a mining project interest, or a
pre-mining project interest, is transferred or split.
The miner that has an interest after a transfer or split is liable
to pay the Minerals Resource Rent Tax (MRRT) for that interest for
the whole year, not just for the period after the transfer or
split.

10.2
All legislative references throughout this chapter are to the
Minerals Resource Rent Tax Bill 2011 unless otherwise
indicated.

Summary of new law

10.3
A mining project interest is the basis upon which a miner’s
MRRT liability is determined. It anchors the operation of the
MRRT. If a miner has mining revenue, mining expenditure,
allowance components or starting base assets, it will have them for
a mining project interest.

10.4
A mining project transfer is an arrangement that results in the
whole mining project interest being transferred from one miner to a
single other entity.

10.5
A mining project split is an arrangement that results in the whole
or a part of a mining project interest being transferred from one
miner to one or more other entities.

10.6
A mining project split also happens if:

â¢
a production right to which the mining project interest relates is
split; or

â¢
the constituent interests of a combined interest cease being
integrated with each other.

10.7
A mining project interest that is transferred from a miner to
another entity by way of a mining project transfer is taken to
continue in the hands of the new miner. That is, the tax
history of the original interest remains with the interest after
the transfer.

10.8
The miner that has the mining project interest after the transfer
is the miner liable to pay MRRT for that interest for the entire
MRRT year, including the period before the transfer.

10.9
Similarly, mining project interests that result from a mining
project split are taken to be continuations of the mining project
interest that was split. That is, the tax history of the
mining project interest is inherited by the interests that emerge
from the split and the miners that have those interests are liable
for the MRRT payable in relation to the original interest for the
entire MRRT year, including the period before the split.

10.10
For a mining project split, the extent to which the tax history and
tax liability of the original mining project interest are inherited
by the new interests is determined by applying the split
percentage.

10.11
The split percentage is a reasonable approximation of the market
value of a new interest relative to the total market values of all
the interests arising from the split.

Detailed explanation of new
law

When a mining project transfer
occurs

10.13
A mining
project transfer is an arrangement that results in a
whole mining project interest being transferred from the original
miner to another entity, the new miner. [Subsection
120-10(3)]

10.14
The miner’s entitlement may be a share in the output of a
mining venture or an entitlement to extract taxable resources
[section
15-5] . The mining project
transfer is effected when a miner gives that particular entitlement, being
the share in an output of a mining venture
or the entitlement to extract taxable resources, to another
entity.

Example
10.1 : Mining project transfer

A Co has a mining
project interest because it has an entitlement to extract taxable
resources from the area covered by a production right (a residual
mining project interest).

A Co enters into
an arrangement that has the effect of transferring its entitlement
to B Co. B Co now has the entitlement to extract taxable
resources from the area covered by the production right (the
residual mining project interest).

This is a mining
project transfer.

10.15
‘Arrangement’ has the same wide meaning as in the
Income Tax Assessment Act
1997 (ITAA 1997). [Section 300-1, definition of
‘arrangement’]